MIA (by law)

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BY-LAWS (ON PROFESSIONAL ETHICS, CONDUCT AND PRACTICE) OF THE MALAYSIAN INSTITUTE OF ACCOUNTANTS

1. FOREWORD

1. These By-Laws are made by the Council of the Malaysian Institute of Accountants (the „Institute‟) on 24

November 2006 pursuant to Section 10(a) of the Accountants Act 1967, and shall come into effect on 1

January 2007 unless otherwise stated herein.

2. These By-Laws may be cited collectively as the By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants [issued January 2007] and revokes and supercedes the Institute‟s

existing By-Laws (On Professional Conduct and Ethics) [Revised January 2002] and other By-Laws that have been issued by the Council. However, such revocation shall not affect any investigation or disciplinary

proceedings before the Investigation Committee or the Disciplinary Committee respectively in respect of

any offences or breaches committed pursuant to the relevant By-Laws applicable at the time of the offence or breach.

3. The By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants comprise of two main parts. Part I relates to the By-Laws on Professional Ethics which is substantially based

on the Code of Ethics for Professional Accountants issued by the International Federation of Accountants

(IFAC). The By-Laws on Professional Ethics establishes the ethical requirements and standards applicable to all members of the Institute as professional accountants. Part II of these By-Laws relates to the By-Laws on

Professional Conduct and Practice which contain prescriptive obligations applicable to members or member

firms (as defined herein) of the Institute in respect of their professional conduct or the practice of their firms.

4. The By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants set the standards of professional ethics and professional conduct for members and member firms in view of the

professional responsibilities and duties owed to their clients, employers, the authorities and the public. In

recognising the significant role played by the accountancy profession in society, these By-Laws have been framed with the objective that members exhibit the highest standards of ethics, professionalism and

professional conduct that are expected of the profession.

5. A breach of these By-Laws will prima facie give rise to a complaint of unprofessional conduct against the

member concerned. As such, members who fail to observe proper standards of ethics and professional

conduct as set out in these by-laws may be required to answer a complaint before the Investigation and the Disciplinary Committees of the Institute pursuant to the Malaysian Institute of Accountants (Disciplinary)

Rules 2002 [P.U.(A) 229/2002].

6. This Foreword and the Definitions set out in the next section, form part of these By-Laws and should be construed accordingly. Likewise, any additional guidance, explanatory notes or commentary which are

included in these By-Laws to provide further guidance or to explain the intention and meaning of a certain paragraph or sub-paragraph of the By-Laws, also form part of these By-Laws and should be construed

accordingly. However, the additional guidance, explanatory notes or commentary are not and cannot be all

encompassing and it is for members to exercise their own judgment in applying the principles and the spirit of the By-Laws to the circumstances in which they find themselves at any given time.

7. Due compliance with the provisions in these By-Laws is the responsibility of each member as professional accountants.

8. The Council of the Institute may from time to time amend these By-Laws. It is the responsibility of

members to update themselves and ensure that they understand, comprehend and implement the requirements in these By-Laws.

2. DEFINITIONS

These By-Laws are made by the Council of the Malaysian Institute of Accountants (the „Institute‟) on 24

November 2006 pursuant to Section 10(a) of the Accountants Act 1967, and shall come into effect on 1

January 2007 unless otherwise stated herein.

(i) Act The Accountants Act 1967.

(ii) advertising The communication to the public of information as to the services or skills provided by professional accountants in public practice with a

view to procuring professional business.


(iii) assurance client The responsible party that is the person (or persons) who:

(a) In a direct reporting engagement, is responsible for the subject matter; or

(b) In an assertion-based engagement, is responsible for the subject matter information and may be responsible for the

subject matter.

(For an assurance client that is a financial statement audit client see the definition of financial statement audit client.)

(iv) assurance engagement An engagement in which a professional accountant in public practice

expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the

outcome of the evaluation or measurement of a subject matter against criteria.

(For guidance on assurance engagements see the International Framework for Assurance Engagements issued by the International

Auditing and Assurance Standards Board which describes the elements and objectives of an assurance engagement and identifies

engagements to which International Standards on Auditing (ISAs),

International Standards on Review Engagements (ISREs) and International Standards on Assurance Engagements (ISAEs) apply.)

(v) assurance team (a) All members of the engagement team for the assurance engagement;

(b) All others within a firm who can directly influence the outcome

of the assurance engagement, including:

(i) those who recommend the compensation of, or who provide

direct supervisory, management or other oversight of the

assurance engagement partner in connection with the performance of the assurance engagement. For the purposes of

a financial statement audit engagement this includes those at all successively senior levels above the engagement partner

through the firm‟s chief executive;

(ii) those who provide consultation regarding technical or industry specific issues, transactions or events for the

assurance engagement; and

(iii) those who provide quality control for the assurance

engagement, including those who perform the engagement

quality control review for the assurance engagement; and

(c) For the purposes of a financial statement audit client, all those

within a network firm who can directly influence the outcome of

the financial statement audit engagement.

(vi) CARE Chartered Accountant‟s Relevant Experience. (An assessment

programme that focuses on the entry level of competency required for admission as a Chartered Accountant of the Institute)

(vii) clearly insignificant A matter that is deemed to be both trivial and inconsequential.

(viii) close family A parent, child or sibling, who is not an immediate family member.

(ix) commission Commission includes commission paid in cash and in kind.

(x) contingent fee A fee calculated on a predetermined basis relating to the outcome or result of a transaction or the result of the work performed. A fee that

is established by a court or other public authority is not a contingent

fee.

(xi) Council The Council of the Malaysian Institute of Accountants established by

section 8 of the Act.

(xii) CPE Continuing professional education.

(xiii) CPE cycle CPE cycle is three consecutive calendar years commencing on:

(a) the first day of the calendar year immediately following the end


of the previous CPE cycle applicable to the professional

accountant; or

(b) (i) the first day of the calendar year in which the professional

accountant is first admitted to the Institute, if first admitted prior to 30 June of that year; or

(ii) first day of the calendar year immediately following the year

in which the professional accountant is first admitted to the Institute, if first admitted after 30 June of that year.

(xiv) CPE learning activities CPE learning activities that develop and maintain capabilities to

enable professional accountants to perform competently within their professional environments. CPE learning activities may comprise of

structured and unstructured learning activities.

(xv) direct financial interest A financial interest which is:

(a) Owned directly by and under the control of an individual or

entity (including those managed on a discretionary basis by others); or

(b) Beneficially owned through a collective investment vehicle, estate, trust or other intermediary over which the individual or

entity has control.

(xvi) director or officer Those charged with the governance of an entity, regardless of their title, and include those persons defined as such in section 4(1) of the

Companies Act 1965.

(xvii) engagement partner The partner or other person in the firm who is responsible for the

engagement and its performance, and for the report that is issued on

behalf of the firm, and who, where required, has the appropriate authority from a professional, legal or regulatory body.

(xviii) engagement quality control

review

A process designed to provide an objective evaluation, before the

report is issued, of the significant judgments the engagement team made and the conclusions they reached in formulating the report.

(xix) engagement team All personnel performing an engagement, including any experts contracted by the firm in connection with that engagement.

(xx) existing accountant A professional accountant in public practice currently holding an audit

appointment or carrying out accounting, taxation, consulting or similar professional services for a client.

(xxi) financial interest An interest in an equity or other security, debenture, loan or other debt instrument of an entity, including rights and obligations to

acquire such an interest and derivatives directly related to such

interest.

(xxii) financial statements The balance sheets, income statements or profit and loss accounts,

statements of changes in financial position (which may be presented

in a variety of ways, for example, as a statement of cash flows or a statement of fund flows), notes and other statements and

explanatory material which are identified as being part of the financial statements.

(xxiii) financial statement audit

client

An entity in respect of which a firm conducts a financial statement

audit engagement. When the client is a listed entity or public interest entity, financial statement audit client will always include its related

entities.

(xxiv) financial statement audit

engagement

A reasonable assurance engagement in which a professional

accountant in public practice expresses an opinion whether financial

statements are prepared in all material respects in accordance with an identified financial reporting framework, such as an engagement

conducted in accordance with the Malaysian Approved or

International Standards on Auditing. This includes a Statutory Audit, which is a financial statement audit required by the Companies Act

1965 or other legislation.

(xxv) firm (a) A member firm;


(b) An entity that controls the member firm; or

(c) An entity controlled by the member firm.

(xxvi) firm (a) A member firm;

(b) An entity that controls the member firm through ownership, management or other means; or

(c) An entity controlled by the member firm through ownership,

management or other means.

(Inserted 25 MAY 2007; With effect from 31 December 2008

for assurance reports dated on or after this date)

(xxvii) immediate family A spouse (or equivalent) or dependant.

(xxviii) independence Independence is:

(a) Independence of mind – the state of mind that permits the

provision of an opinion without being affected by influences that

compromise professional judgment, allowing an individual to act with integrity, and exercise objectivity and professional

judgment.

(b) Independence in appearance – the avoidance of facts and

circumstances that are so significant a reasonable and informed

third party, having knowledge of all relevant information, including any safeguards applied, would reasonably conclude a

firm‟s, or a member of the assurance team‟s, integrity, objectivity or professional skepticism had been compromised.

(xxix) indirect financial

interest

A financial interest beneficially owned through a collective investment

vehicle, estate, trust or other intermediary over which the individual or entity has no control.

Institute The Malaysian Institute of Accountants established by section 3 of the

Act.

(xxx) listed entity An entity whose shares, stock or debt are quoted or listed on a

recognized stock exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent body.

(xxxi) member A professional accountant who is registered with the Institute in

accordance with the Act as a chartered accountant, licensed accountant or an associate member.

(xxxii) member in public practice A member (other than an associate member) who as a sole proprietor or in a partnership, provides or is engaged in public practice services

in return for a fee or reward for such services otherwise than as an

employee, and who holds a valid practising certificate issued pursuant to rule 9 of the Malaysian Institute of Accountants (Membership and

Council) Rules 2001.

(This definition is narrower than the definition of professional accountants in public practice below, as it is confined to those

members providing public practice services who hold valid practising certificates.)

(xxxiii) member firm A sole proprietor or partnership of professional accountants who are

members of the Institute and which is established pursuant to section 500 herein.

network A larger structure:

(a) That is aimed at co-operation, and

(b) That is clearly aimed at profit or cost sharing or shares common

ownership, control or management, common quality control policies and procedures, common business strategy, the use of

common brand-name, or a significant part of professional

resources.

(Inserted 25 May 2007; With effect from 31 December 2008


(xxxiv) network firm An entity under common control, ownership or management with the

firm or any entity that a reasonable and informed third party having

knowledge of all relevant information would reasonably conclude as


being part of the firm nationally or internationally.

network firm A firm or entity that belongs to a network. (Inserted 25 May 2007; With effect from 31 December 2008


(xxxv) office A distinct sub-group, whether organized on geographical or practice

lines.

(xxxvi) professional accountant A member of the Institute.

(xxxvii) professional accountant in

business

A professional accountant employed or engaged in an executive or

non-executive capacity in such areas as commerce, industry, service,

the public sector, education, the not for profit sector, regulatory bodies or professional bodies, or a professional accountant contracted

by such entities.

(xxxviii) professional accountant in

public practice

A professional accountant, irrespective of functional classification

(e.g., audit, tax or consulting) in a firm that provides public practice

services. This term is also used to refer to a firm of professional accountants in public practice.

(xxxix) professional services Services requiring accountancy or related skills performed by a professional accountant.

(xl) public interest entity An entity which is of significant public interest because, as a result of

the type of business, size or corporate status, that entity has a wide range of stakeholders. Such entities possess certain authority or

enjoy a particular position in society where public accountability can be deemed to exist wherein it is likely that there may be sufficient

stakeholders who base their resource allocation decisions upon their

knowledge of such entities. Such entities include listed entities, non-listed public companies falling within the purview of the regulatory

authorities such as the Securities Commission or Bank Negara

Malaysia, or statutory bodies or government controlled entities that are of significant public interest, and which require financial

statement audits.

(xli) public practice services Services requiring accountancy or related skills performed by a

professional accountant in public practice including:

(a) auditing (including internal auditing); (b) accounting and all forms of accounting related consultancy;

(c) accounting related investigations or due diligence; (d) forensic accounting;

(e) taxation, tax advice and consultancy;

(f) bookkeeping; (g) costing and management accounting;

(h) insolvency, liquidation and receiverships;

(i) provision of management information systems and internal controls;

(j) provision of secretarial services under the Companies Act, 1965; or

(k) such other services as the Council may from time to time

prescribe.

(xlii) related entity An entity that has any of the following relationships with the client:

(a) An entity that has direct or indirect control over the client provided the client is material to such entity;

(b) An entity with a direct financial interest in the client provided that

such entity has significant influence over the client and the interest in the client is material to such entity;

(c) An entity over which the client has direct or indirect control;

(d) An entity in which the client, or an entity related to the client under (c) above, has a direct financial interest that gives it significant

influence over such entity and the interest is material to the client and its related entity in (c); and

(e) An entity which is under common control with the client

(hereinafter a “sister entity”) provided the sister entity and the client are both material to the entity that controls both the client and sister

entity.

(xliii) Rules The rules of the Institute made from time to time pursuant to section


7 of the Act and duly gazetted.

(xliv) structured CPE learning activities

CPE learning activities which have a clear set of objectives and a logical framework. Structured CPE learning activities include

attendances either as presenter/lecturer or participant at short courses, conferences and seminars, recognised post-graduate studies

or diploma courses and formal „home study‟ or distance learning

courses which require participation and assessment. Such activities include participation or rendering services in a technical committee

where technical material is prepared by the professional accountant,

or writing technical articles, papers or books for publication.

(xlv) unprofessional conduct Conduct which is discreditable to the accountancy profession and

includes gross carelessness, neglect and incapacity in the performance of professional duties, impropriety in professional

conduct and conduct unbecoming of a professional accountant.

(xlvi) unstructured CPE learning activities

CPE learning activities which include private reading and study, and technical research for practical work.

(xlvii) verifiable CPE learning

CPE learning activities which can be objectively verified by a competent source. Examples of evidence for verification of CPE

learning include attendance certificates, course outlines and

materials, evidence of enrolment or registration in a CPE activity, qualification or assessment reports, employer‟s reports or

confirmations of participation in in-house CPE activities or training programmes, academic awards and receipts.

2. PART I: BY-LAWS ON PROFESSIONAL ETHICS

EXPLANATORY FOREWORD

1. Part I of the By-Laws of the Institute consists of the By-Laws on Professional Ethics which incorporates the Code of Ethics for Professional Accountants issued by the International Federation of Accountants

(IFAC) in June 2005 and as amended by IFAC from time to time, as well as additional requirements

applicable to the Malaysian regulatory and professional environment. The By-Laws on Professional Ethics establishes the ethical requirements and standards applicable to all members of the Institute as

professional accountants.

2. A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the

public interest. Therefore, a professional accountant‟s responsibility is not exclusively to satisfy the

needs of an individual client or employer. In acting in the public interest a professional accountant should observe and comply with the ethical requirements in these By-Laws.

3. The By-Laws on Professional Ethics consists of three parts. Part A establishes the fundamental principles of professional ethics for professional accountants and provides a conceptual framework for

applying those principles. The conceptual framework provides guidance on fundamental ethical

principles. Professional accountants are required to apply this conceptual framework to identify threats to compliance with the fundamental principles, to evaluate their significance and, if such threats are

other than clearly insignificant to apply safeguards to eliminate them or reduce them to an acceptable

level such that compliance with the fundamental principles is not compromised.

4. Parts B and C illustrate how the conceptual framework is to be applied in specific situations. It

provides examples of safeguards that may be appropriate to address threats to compliance with the fundamental principles and also provides examples of situations where safeguards are not available to

address the threats and consequently the activity or relationship creating the threats should be

avoided. Part B applies to professional accountants in public practice. Part C applies to professional accountants in business. Professional accountants in public practice may also find the guidance in Part

C relevant to their particular circumstances.

PART A: GENERAL APPLICATION 100 Fundamental Principles and Conceptual Framework

100.1 A professional accountant is required to comply with the following fundamental principles:

(a) Integrity

A professional accountant should be straightforward and honest in all professional

and business relationships.


100.9 Compliance with the fundamental principles may potentially be threatened by a broad range of circumstances. Many threats fall into the following categories:

(b) Objectivity

A professional accountant should not allow bias, conflict of interest or undue

influence of others to override professional or business judgments.

(c) Professional Competence and Due Care

A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent

professional service based on current developments in practice, legislation and

techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services.

(d) Confidentiality

A professional accountant should respect the confidentiality of information acquired

as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is

a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the

personal advantage of the professional accountant or third parties.

(e) Professional Behaviour

A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession. Each of these fundamental

principles is discussed in more detail in Sections 110 – 150.

100.2 The circumstances in which professional accountants operate may give rise to specific threats to compliance with the fundamental principles. It is impossible to define every

situation that creates such threats and specify the appropriate mitigating action. In addition, the nature of engagements and work assignments may differ and consequently different

threats may exist, requiring the application of different safeguards.

100.3 A conceptual framework that requires a professional accountant to identify, evaluate and address threats to compliance with the fundamental principles, rather than merely comply

with a set of specific rules which may be arbitrary, is, therefore, in the public interest.

100.4 The By-Laws on Professional Ethics provides a framework to assist a professional accountant

to identify, evaluate and respond to threats to compliance with the fundamental principles. If

identified threats are other than clearly insignificant, a professional accountant should, where appropriate, apply safeguards to eliminate the threats or reduce them to an

acceptable level, such that compliance with the fundamental principles is not compromised.

100.5 A professional accountant has an obligation to evaluate any threats to compliance with the fundamental principles when the professional accountant knows, or could reasonably be

expected to know, of circumstances or relationships that may compromise compliance with the fundamental principles.

100.6 A professional accountant should take qualitative as well as quantitative factors into account

when considering the significance of a threat. If a professional accountant cannot implement appropriate safeguards, the professional accountant should decline or discontinue the

specific professional service involved, or where necessary resign from the client (in the case of a professional accountant in public practice) or the employing organization (in the case of

a professional accountant in business).

100.7 A professional accountant may inadvertently violate a provision of these By-Laws. Such an inadvertent violation, depending on the nature and significance of the matter, may not

compromise compliance with the fundamental principles provided, once the violation is

discovered, the violation is corrected promptly and any necessary safeguards are applied.

100.8 Parts B and C include examples that are intended to illustrate how the conceptual framework

is to be applied. The examples are not intended to be, nor should they be interpreted as, an exhaustive list of all circumstances experienced by a professional accountant that may

create threats to compliance with the fundamental principles. Consequently, it is not

sufficient for a professional accountant merely to comply with the examples presented; rather, the framework should be applied to the particular circumstances encountered by the

professional accountant.


(a) Self-interest threats, which may occur as a result of the financial or other interests of a professional accountant or of an immediate or close family member;

(b) Self-review threats, which may occur when a previous judgment needs to be reevaluated by the professional accountant responsible for that judgment;

(c) Advocacy threats, which may occur when a professional accountant promotes a

position or opinion to the point that subsequent objectivity may be compromised;

(d) Familiarity threats, which may occur when, because of a close relationship, a

professional accountant becomes too sympathetic to the interests of others; and

(e) Intimidation threats, which may occur when a professional accountant may be deterred from acting objectively by threats, actual or perceived.

100.10 Parts B and C respectively, provide examples of circumstances that may create these categories of threats for professional accountants in public practice and professional

accountants in business. Professional accountants in public practice may also find the

guidance in Part C relevant to their particular circumstances.

100.11 Safeguards that may eliminate or reduce such threats to an acceptable level fall into two

broad categories: (a) Safeguards created by the profession, legislation or regulation; and

(b) Safeguards in the work environment.

100.12 Safeguards created by the profession, legislation or regulation include, but are not restricted to:

(a) Educational, training and experience requirements for entry into the profession. (b) Continuing professional education requirements.

(c) Corporate governance regulations.

(d) Professional standards. (e) Professional or regulatory monitoring and disciplinary procedures.

(f) External review by a legally empowered third party of the reports, returns,

communications or information produced by a professional accountant.

100.13 Parts B and C respectively, discuss safeguards in the work environment for professional

accountants in public practice and those in business.

100.14 Certain safeguards may increase the likelihood of identifying or deterring unethical

behaviour. Such safeguards, which may be created by the accounting profession,

legislation, regulation or an employing organization, include, but are not restricted to: (a) Effective, well publicized complaints systems operated by the employing organization,

the profession or a regulator, which enable colleagues, employers and members of the public to draw attention to unprofessional conduct or unethical behaviour.

(b) An explicitly stated duty to report breaches of ethical requirements.

100.15 The nature of the safeguards to be applied will vary depending on the circumstances. In exercising professional judgment, a professional accountant should consider what a

reasonable and informed third party, having knowledge of all relevant information,

including the significance of the threat and the safeguards applied, would conclude to be unacceptable.

100.16 In evaluating compliance with the fundamental principles, a professional accountant may be required to resolve a conflict in the application of fundamental principles.

100.17 When initiating either a formal or informal conflict resolution process, a professional

accountant should consider the following, either individually or together with others, as part of the resolution process:

(a) Relevant facts; (b) Ethical issues involved;

(c) Fundamental principles related to the matter in question;

(d) Established internal procedures; and (e) Alternative courses of action.

Having considered these issues, a professional accountant should determine the

appropriate course of action that is consistent with the fundamental principles identified. The professional accountant should also weigh the consequences of each possible course

of action. If the matter remains unresolved, the professional accountant should consult with other appropriate persons within the firm or employing organization for help in

obtaining resolution.


110 Integrity

130.2 Competent professional service requires the exercise of sound judgment in applying

professional knowledge and skill in the performance of such service. Professional competence may be divided into two separate phases:

(a) Attainment of professional competence; and

(b) Maintenance of professional competence.

100.18 Where a matter involves a conflict with, or within, an organization, a professional

accountant should also consider consulting with those charged with governance of the organization, such as the board of directors or the audit committee.

100.19 It may be in the best interests of the professional accountant to document the

substance of the issue and details of any discussions held or decisions taken, concerning that issue.

100.20 If a significant conflict cannot be resolved, a professional accountant may wish to

obtain guidance from the Institute or professional advice from his or her legal advisors, and thereby obtain guidance on ethical issues without breaching

confidentiality. For example, a professional accountant may have encountered a fraud, the reporting of which could breach the professional accountant‟s responsibility

to respect confidentiality. The professional accountant should consider obtaining legal

advice to determine whether there is a requirement to report.

100.21 If, after exhausting all relevant possibilities, the ethical conflict remains unresolved, a

professional accountant should, where possible, refuse to remain associated with the matter creating the conflict. The professional accountant may determine that, in the

circumstances, it is appropriate to withdraw from the engagement team or specific

assignment, or to resign altogether from the engagement, the firm or the employing organization.

110.1 The principle of integrity imposes an obligation on all professional accountants to be

straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.

110.2 A professional accountant should not prepare, attest, certify or otherwise be associated with reports, returns, communications or other information where the professional

accountant believes that the information:

(a) Contains a materially false or misleading statement; (b) Contains statements or information furnished recklessly; or

(c) Omits or obscures information required to be included where such omission or obscurity would be misleading.

110.3 A professional accountant will not be considered to be in breach of paragraph 110.2 if the

professional accountant provides a modified report in respect of a matter contained in paragraph 110.2.

120 Objectivity

120.1 The principle of objectivity imposes an obligation on all professional accountants not to

compromise their professional or business judgment because of bias, conflict of interest

or the undue influence of others.

120.2 A professional accountant may be exposed to situations that may impair objectivity. It

is impracticable to define and prescribe all such situations. Relationships that bias or unduly influence the professional judgment of the professional should be avoided.

130 Professional Competence and Due Care

130.1 The principle of professional competence and due care imposes the following obligations on professional accountants:

(a) To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service; and

(b) To act diligently in accordance with applicable technical and professional

standards when providing professional services.

http://www.mia.org.my/handbook/bylaws_new/part1_110.htm




130.3 The maintenance of professional competence requires a continuing

awareness and an understanding of relevant technical professional and business developments. Continuing professional education develops and

maintains the capabilities that enable a professional accountant to perform competently within the professional environments.

130.4 Due care and diligence encompasses the responsibility to act in accordance

with the requirements of an assignment, carefully, thoroughly and on a timely basis.

130.5 A professional accountant should take steps to ensure that those working

under the professional accountant‟s authority in a professional capacity have appropriate training and supervision.

130.6 Where appropriate, a professional accountant should make clients, employers or other users of the professional services aware of limitations

inherent in the services to avoid the misinterpretation of an expression of

opinion as an assertion of fact.

140 Confidentiality

140.1 The principle of confidentiality imposes an obligation on professional

accountants to refrain from:

(a) Disclosing outside the firm or employing organization confidential

information acquired as a result of professional and business relationships without proper and specific authority or unless there is a

legal or professional right or duty to disclose; and

(b) Using confidential information acquired as a result of professional and business relationships to their personal advantage or the advantage of

third parties.

140.2 A professional accountant should maintain confidentiality even in a social environment. The professional accountant should be alert to the possibility of

inadvertent disclosure, particularly in circumstances involving long association with a business associate or a close or immediate family member.

140.3 A professional accountant should also maintain confidentiality of information

disclosed by a prospective client or employer.

140.4 A professional accountant should also consider the need to maintain

confidentiality of information within the firm or employing organization.

140.5 A professional accountant should take all reasonable steps to ensure that staff

under the professional accountant‟s control and persons from whom advice

and assistance is obtained respect the professional accountant‟s duty of confidentiality.

140.6 The need to comply with the principle of confidentiality continues even after the end of relationships between a professional accountant and a client or

employer. When a professional accountant changes employment or acquires a

new client, the professional accountant is entitled to use prior experience. The professional accountant should not, however, use or disclose any confidential

information either acquired or received as a result of a professional or

business relationship.

140.7 The following are circumstances where professional accountants are or may

be required to disclose confidential information or when such disclosure may be appropriate:

(a) Disclosure is permitted by law and is authorized by the client or the

employer;

(b) Disclosure is required by law, for example:

(i) Production of documents or other provision of evidence in the course of legal proceedings; or

(ii) Disclosure to the appropriate public authorities of infringements of

the law that come to light; and

(c) There is a professional duty or right to disclose, when not prohibited by

law:



150.1 Professional Behaviour

150.2 Advertising, Marketing and Promotions

(i) To comply with the quality assurance or practice review

programme of the Institute ;

(ii) To respond to an inquiry or investigation by the Institute‟s

Investigation Committee or Disciplinary Committee or any other regulatory body;

(iii) To protect the professional interests of a professional accountant

in legal proceedings; or

(iv) To comply with technical standards and ethics requirements.

Please also refer to the additional guidance on confidentiality in Appendix I to

the By-Laws.

140.8 In deciding whether to disclose confidential information, professional

accountants should consider the following points:

(a) Whether the interests of all parties, including third parties whose

interests may be affected, could be harmed if the client or employer

consents to the disclosure of information by the professional accountant;

(b) Whether all the relevant information is known and substantiated, to the extent it is practicable; when the situation involves unsubstantiated

facts, incomplete information or unsubstantiated conclusions,

professional judgment should be used in determining the type of disclosure to be made, if any; and

(c) The type of communication that is expected and to whom it is addressed; in particular, professional accountants should be satisfied

that the parties to whom the communication is addressed are

appropriate recipients.

150 Professional Behaviour

150.1 The principle of professional behaviour imposes an obligation on professional accountants to comply with the relevant laws and regulations in addition to

these By-Laws and avoid any action that may bring discredit to the profession.

This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the

good reputation of the profession.

150.1A In reference to section 150.1, the relevant laws and regulations will include but

are not limited to the provisions in the Companies Act, 1965 (for example,

section 9, section 10 and section 182) the provisions in the Securities Industry Act, 1983, the Banking and Financial Institutions Act, 1989 and other relevant

legislation currently in force. The specific legislation stated above are merely examples of the relevant laws and regulations that professional accountants

must comply with and are by no means exhaustive.

150.2 In advertising, marketing or promoting themselves and their work, professional

accountants should not bring the profession into disrepute and should ensure that such advertisement, marketing or promotional material is:

(a) professionally dignified and in good taste; and (b) carried out in accordance with the relevant legislation where applicable.

150.3 Professional accountants should be honest and truthful and should not:

(a) make exaggerated claims for the services they are able to offer, the qualifications they possess, or experience they have gained; or

(b) make disparaging references or unsubstantiated comparisons to the work

of others.

http://www.mia.org.my/handbook/bylaws_new/part1_150-1.htm

http://www.mia.org.my/handbook/bylaws_new/part1_150-2.htm


PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

Section 200 Introduction

Introduction

200.1 Part B illustrates how the conceptual framework contained in Part A is to be applied by professional

accountants in public practice. The examples in the following sections are not intended to be, nor should

they be interpreted as, an exhaustive list of all circumstances experienced by a professional accountant in

public practice that may create threats to compliance with the principles. Consequently, it is not sufficient

for a professional accountant in public practice merely to comply with the examples presented; rather, the

framework should be applied to the particular circumstances faced.

200.2 A professional accountant in public practice should not engage in any business, occupation or activity that

impairs or might impair integrity, objectivity or the good reputation of the profession and as a result would

be incompatible with the rendering of professional services.


Threats and Safeguards

200.3 (1) Compliance with the fundamental principles may potentially be threatened by a broad range of

circumstances. Many threats fall into the following categories:

(a) Self-interest;

(b) Self-review;

(c) Advocacy;

(d) Familiarity; and

(e) Intimidation.

These threats are discussed further in Part A.

(2) The nature and significance of the threats may differ depending on whether they arise in relation to the

provision of services to a financial statement audit client, a non-financial statement audit assurance client

or a non-assurance client.

200.4 Examples of circumstances that may create self-interest threats for a professional accountant in public

practice include, but are not limited to:

(a) A financial interest in a client or jointly holding a financial interest with a client.

(b) Undue dependence on total fees from a client.

(c) Having a close business relationship with a client.

(d) Concern about the possibility of losing a client.

(e) Potential employment with a client.

(f) Contingent fees relating to an assurance engagement.

(g) A loan to or from an assurance client or any of its directors or officers.

200.5 Examples of circumstances that may create self-review threats include, but are not limited to:

(a) The discovery of a significant error during a re-evaluation of the work of the professional accountant in

public practice.

(b) Reporting on the operation of financial systems after being involved in their design or implementation.

(c) Having prepared the original data used to generate records that are the subject matter of the

engagement.

(d) A member of the assurance team being, or having recently been, a director or officer of that client.

(e) A member of the assurance team being, or having recently been, employed by the client in a position to

exert direct and significant influence over the subject matter of the engagement.

(f) Performing a service for a client that directly affects the subject matter of the assurance engagement.

200.6 Examples of circumstances that may create advocacy threats include, but are not limited to:

(a) Promoting shares in a listed entity when that entity is a financial statement audit client.

(b) Acting as an advocate on behalf of an assurance client in litigation or disputes with third parties.

200.7 Examples of circumstances that may create familiarity threats include, but are not limited to:

a) A member of the engagement team having a close or immediate family relationship with a director or

officer of the client.


(b) A member of the engagement team having a close or immediate family relationship with an employee of

the client who is in a position to exert direct and significant influence over the subject matter of the

engagement.

(c) A former partner of the firm being a director or officer of the client or an employee in a position to exert

direct and significant influence over the subject matter of the engagement.

(d) Accepting gifts or preferential treatment from a client, unless the value is clearly insignificant.

(e) Long association of senior personnel with the assurance client.

200.8 Examples of circumstances that may create intimidation threats include, but are not limited to:

(a) Being threatened with dismissal or replacement in relation to a client engagement.

(b) Being threatened with litigation.

(c) Being pressured to reduce inappropriately the extent of work performed in order to reduce fees.

(d) Being threatened with non-payment of outstanding fees.

200.9 A professional accountant in public practice may also find that specific circumstances give rise to unique

threats to compliance with one or more of the fundamental principles. Such unique threats obviously cannot

be categorized. In either professional or business relationships, a professional accountant in public practice

should always be on the alert for such circumstances and threats.

200.10 Safeguards that may eliminate or reduce threats to an acceptable level fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation; and


Examples of safeguards created by the profession, legislation or regulation are described in paragraph

100.12 of Part A.

200.11 In the work environment, the relevant safeguards will vary depending on the circumstances. Work

environment safeguards comprise firm-wide safeguards and engagement specific safeguards. A professional

accountant in public practice should exercise judgment to determine how to best deal with an identified

threat. In exercising this judgment a professional accountant in public practice should consider what a

reasonable and informed third party, having knowledge of all relevant information, including the significance

of the threat and the safeguards applied, would reasonably conclude to be acceptable. This consideration

will be affected by matters such as the significance of the threat, the nature of the engagement and the

structure of the firm.

200.12 Firm-wide safeguards in the work environment may include:

(a) Leadership of the firm that stresses the importance of compliance with the fundamental principles.

(b) Leadership of the firm that establishes the expectation that members of an assurance team will act in

the public interest.

(c) Policies and procedures to implement and monitor quality control of engagements.

(d) Documented policies regarding the identification of threats to compliance with the fundamental

principles, the evaluation of the significance of these threats and the identification and the application

of safeguards to eliminate or reduce the threats, other than those that are clearly insignificant, to an

acceptable level.

(e) firms that perform assurance engagements, documented independence policies regarding the

identification of threats to independence, the evaluation of the significance of these threats and the

evaluation and application of safeguards to eliminate or reduce the threats, other than those that are

clearly insignificant, to an acceptable level.

(f) Documented internal policies and procedures requiring compliance with the fundamental principles.

(g) Policies and procedures that will enable the identification of interests or relationships between the

firm or members of engagement teams and clients.

(h) Policies and procedures to monitor and, if necessary, manage the reliance on revenue received from

a single client.

(i) Policies and procedures to monitor billing and collection of unpaid fees in a timely manner.

(j) Using different partners and engagement teams with separate reporting lines for the provision of

non-assurance services to an assurance client.


(k) Policies and procedures to prohibit individuals who are not members of an engagement team from

inappropriately influencing the outcome of the engagement.

(l) Timely communication of a firm‟s policies and procedures, including any changes to them, to all

partners and professional staff, and appropriate training and education on such policies and

procedures.

(m) Designating a member of senior management to be responsible for overseeing the adequate

functioning of the firm‟s quality control system.

(n) Advising partners and professional staff of those assurance clients and related entities from which

they must be independent.

(o) A disciplinary mechanism to promote compliance with policies and procedures.

(p) Published policies and procedures to encourage and empower staff to communicate to senior levels

within the firm any issue relating to compliance with the fundamental principles that concerns them.

200.13 Engagement-specific safeguards in the work environment may include:

(a) Involving an additional professional accountant to review the work done or otherwise advise as

necessary.

(b) Consulting an independent third party, such as a committee of independent directors, a professional

regulatory body or another professional accountant.

(c) Discussing ethical issues with those charged with governance of the client.

(d) Disclosing to those charged with governance of the client the nature of services provided and extent of

fees charged.

(e) Involving another firm to perform or re-perform part of the engagement.

(f) Rotating senior assurance team personnel.

200.14 Depending on the nature of the engagement, a professional accountant in public practice may also be able

to rely on safeguards that the client has implemented. However it is not possible to rely solely on such

safeguards to reduce threats to an acceptable level.

200.15 Safeguards within the client‟s systems and procedures may include:

(a) When a client appoints a firm in public practice to perform an engagement, persons other than

management ratify or approve the appointment.

(b) The client has competent employees with experience and seniority to make managerial decisions.

(c) The client has implemented internal procedures that ensure objective choices in commissioning non-

assurance engagements.

(d) The client has a corporate governance structure that provides appropriate oversight and

communications regarding the firm‟s services.

Section 210 Professional Appointment

Client Acceptance

210.1 Before accepting a new client relationship, a professional accountant in public practice should consider

whether acceptance would create any threats to compliance with the fundamental principles. Potential

threats to integrity or professional behaviour may be created from, for example, questionable issues

associated with the client (its owners, management and activities).

210.2 Client issues that, if known, could threaten compliance with the fundamental principles include, for

example, client involvement in illegal activities (such as money laundering), dishonesty or questionable

financial reporting practices.

210.3 The significance of any threats should be evaluated. If identified threats are other than clearly insignificant,

safeguards should be considered and applied as necessary to eliminate them or reduce them to an

acceptable level.

210.4 Appropriate safeguards may include obtaining knowledge and understanding of the client, its owners,

managers and those responsible for its governance and business activities, or securing the client‟s

commitment to improve corporate governance practices or internal controls.


210.5 Where it is not possible to reduce the threats to an acceptable level, a professional accountant in public

practice should decline to enter into the client relationship.

210.6 Acceptance decisions should be periodically reviewed for recurring client engagements.

Section 210 Professional Appointment Engagement Acceptance

210.7 A professional accountant in public practice should agree to provide only those services that the

professional accountant in public practice is competent to perform. Before accepting a specific client

engagement, a professional accountant in public practice should consider whether acceptance would create

any threats to compliance with the fundamental principles. For example, a self-interest threat to

professional competence and due care is created if the engagement team does not possess, or cannot

acquire, the competencies necessary to properly carry out the engagement.

210.8 A professional accountant in public practice should evaluate the significance of identified threats and, if they

are other than clearly insignificant, safeguards should be applied as necessary to eliminate them or reduce

them to an acceptable level. Such safeguards may include:

(a) Acquiring an appropriate understanding of the nature of the client‟s business, the complexity of its

operations, the specific requirements of the engagement and the purpose, nature and scope of the

work to be performed.

(b) Acquiring knowledge of relevant industries or subject matters.

(c) Possessing or obtaining experience with relevant regulatory or reporting requirements.

(d) Assigning sufficient staff with the necessary competencies.

(e) Using experts where necessary.

(f) Agreeing on a realistic time frame for the performance of the engagement.

(g) Complying with quality control policies and procedures designed to provide reasonable assurance that

specific engagements are accepted only when they can be performed competently.

210.9 When a professional accountant in public practice intends to rely on the advice or work of an expert, the

professional accountant in public practice should evaluate whether such reliance is warranted. The

professional accountant in public practice should consider factors such as reputation, expertise, resources

available and applicable professional and ethical standards. Such information may be gained from prior

association with the expert or from consulting others.

Section 210 Professional Appointment

Changes in a Professional Appointment

210.10 A professional accountant in public practice who is asked to replace another professional accountant in public practice, or who is considering tendering for an engagement currently held by another professional

accountant in public practice, should determine whether there are any reasons, professional or other, for not accepting the engagement, such as circumstances that threaten compliance with the fundamental

principles. For example, there may be a threat to professional competence and due care if a professional

accountant in public practice accepts the engagement before knowing all the pertinent facts.

210.11 The significance of the threats should be evaluated. Depending on the nature of the engagement, this may

require direct communication with the existing accountant to establish the facts and circumstances behind

the proposed change so that the professional accountant in public practice can decide whether it would be appropriate to accept the engagement. For example, the apparent reasons for the change in appointment

may not fully reflect the facts and may indicate disagreements with the existing accountant that may influence the decision as to whether to accept the appointment.

210.11A A In the case of a financial statement audit engagement, no member in public practice shall accept

nomination for the engagement without enquiring from the existing auditor as to whether there is any professional or other reason for the proposed change of which he should be aware before deciding whether

or not to accept the appointment and, if there are such reasons, requesting the existing auditor to provide him with all the details necessary to enable him to come to a decision.


210.12 An existing accountant is bound by confidentiality. The extent to which the professional accountant in public

practice can and should discuss the affairs of a client with a proposed accountant will depend on the nature of the engagement and on:

(a) Whether the client‟s permission to do so has been obtained; or (b) The legal or ethical requirements relating to such communications and disclosure.

210.13 In the absence of specific instructions by the client, an existing accountant should not ordinarily volunteer

information about the client‟s affairs. Circumstances where it may be appropriate to disclose confidential information are set out in Section 140 of Part A.

210.14 If identified threats are other than clearly insignificant, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level.

210.15 Such safeguards may include:

(a) Discussing the client‟s affairs fully and freely with the existing accountant;

(b) Asking the existing accountant to provide known information on any facts or circumstances, that, in

the existing accountant‟s opinion, the proposed accountant should be aware of before deciding whether to accept the engagement;

(c) When replying to requests to submit tenders, stating in the tender that, before accepting the engagement, contact with the existing accountant will be requested so that inquiries may be made as

to whether there are any professional or other reasons why the appointment should not be accepted.

210.16 A professional accountant in public practice will ordinarily need to obtain the client‟s permission, preferably

in writing, to initiate discussion with an existing accountant. Where:

(a) permission is refused, the professional accountant in public practice should decline the appointment;

(b) permission is obtained, the existing accountant should comply with relevant legal and other

regulations governing such requests. Where the existing accountant provides information, it should be provided honestly and unambiguously and within reasonable time. If the proposed accountant is

unable to communicate with the existing accountant, the proposed accountant should try to obtain

information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management or those charged with governance of the client.

Please refer to the procedures for seeking professional clearance as set out in Appendix II to the By-Laws.

210.17 Where the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, a professional accountant in public practice should, unless there is satisfaction as to necessary

facts by other means, decline the engagement.

210.18 A professional accountant in public practice may be asked to undertake work that is complementary or

additional to the work of the existing accountant. Such circumstances may give rise to potential threats to

professional competence and due care resulting from, for example, a lack of or incomplete information. Safeguards agai

Section 220 Conflicts of Interest Conflicts of Interest

220.1 A professional accountant in public practice should take reasonable steps to identify circumstances that

could pose a conflict of interest. Such circumstances may give rise to threats to compliance with the

fundamental principles. For example, a threat to objectivity may be created when a professional accountant

in public practice competes directly with a client or has a joint venture or similar arrangement with a major

competitor of a client. A threat to objectivity or confidentiality may also be created when a professional

accountant in public practice performs services for clients whose interests are in conflict or the clients are in

dispute with each other in relation to the matter or transaction in question.

220.2 A professional accountant in public practice should evaluate the significance of any threats. Evaluation

includes considering, before accepting or continuing a client relationship or specific engagement, whether

the professional accountant in public practice has any business interests or relationships with the client or a

third party that could give rise to threats. If threats are other than clearly insignificant, safeguards should

be considered and applied as necessary to eliminate them or reduce them to an acceptable level.

220.3 Depending upon the circumstances giving rise to the conflict, safeguards should ordinarily include the

professional accountant in public practice:


(a) Notifying the client of the firm‟s business interest or activities that may represent a conflict of

interest, and obtaining their consent to act in such circumstances; or

(b) Notifying all known relevant parties that the professional accountant in public practice is acting for

two or more parties in respect of a matter where their respective interests are in conflict, and

obtaining their consent to so act; or

(c) Notifying the client that the professional accountant in public practice does not act exclusively for any

one client in the provision of proposed services (for example, in a particular market sector or with

respect to a specific service) and obtaining their consent to so act.

220.4 The following additional safeguards should also be considered:

(a) The use of separate engagement teams; and

(b) Procedures to prevent access to information (e.g., strict physical separation of such teams,

confidential and secure data filing); and

(c) Clear guidelines for members of the engagement team on issues of security and confidentiality; and

(d) The use of confidentiality agreements signed by employees and partners of the firm; and

(e) Regular review of the application of safeguards by a senior individual not involved with relevant client

engagements.

220.5 Where a conflict of interest poses a threat to one or more of the fundamental principles, including

objectivity, confidentiality or professional behaviour, that cannot be eliminated or reduced to an acceptable

level through the application of safeguards, the professional accountant in public practice should conclude

that it is not appropriate to accept a specific engagement or that resignation from one or more conflicting

engagements is required.

220.6 Where a professional accountant in public practice has requested consent from a client to act for another

party (which may or may not be an existing client) in respect of a matter where the respective interests are

in conflict and that consent has been refused by the client, then they must not continue to act for one of the

parties in the matter giving rise to the conflict of interest.

Section 230 Second Opinions

Second Opinions

230.1 Situations where a professional accountant in public practice is asked to provide a second opinion on the

application of accounting, auditing, reporting or other standards or principles to specific circumstances or

transactions by or on behalf of a company or an entity that is not an existing client may give rise to threats

to compliance with the fundamental principles. For example, there may be a threat to professional

competence and due care in circumstances where the second opinion is not based on the same set of facts

that were made available to the existing accountant, or is based on inadequate evidence. The significance

of the threat will depend on the circumstances of the request and all the other available facts and

assumptions relevant to the expression of a professional judgment.

230.2 When asked to provide such an opinion, a professional accountant in public practice should evaluate the

significance of the threats and, if they are other than clearly insignificant, safeguards should be considered

and applied as necessary to eliminate them or reduce them to an acceptable level. Such safeguards may

include seeking client permission to contact the existing accountant, describing the limitations surrounding

any opinion in communications with the client and providing the existing accountant with a copy of the

opinion.

230.3 If the company or entity seeking the opinion will not permit communication with the existing accountant, a

professional accountant in public practice should consider whether, taking all the circumstances into

account, it is appropriate to provide the opinion sought.

Section 240 Fees and Other Types of Remuneration Fees


240.1 When entering into negotiations regarding professional services, a professional accountant in public

practice may quote whatever fee deemed to be appropriate. The fact that one professional accountant in

public practice may quote a fee lower than another is not in itself unethical. Nevertheless, there may be

threats to compliance with the fundamental principles arising from the level of fees quoted. For example,

a self interest threat to professional competence and due care is created if the fee quoted is so low that it

may be difficult to perform the engagement in accordance with applicable technical and professional

standards for that price.

240.2 The significance of such threats will depend on factors such as the level of fee quoted and the services to

which it applies. In view of these potential threats, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level. Safeguards which may be adopted

include:

(a) Making the client aware of the terms of the engagement and, in particular, the basis on which fees

are charged and which services are covered by the quoted fee.

(b) Making the client aware of the statutory duties and responsibilities involved, if any, in respect of the

engagement.

(c) Assigning appropriate time and qualified staff to the task.

240.2A Fees charged for assurance engagements should be a fair reflection of the value of the work involved and

should take into account, among others:

(a) the skill and knowledge required for the type of work involved;

(b) the level of training and experience of the persons necessarily engaged on the work;

(c) the time necessarily occupied by each person engaged on the work; and

(d) the degree of responsibility and urgency that the work entails.

Section 240 Fees and Other Types of Remuneration

Contingent Fees

240.3 Subject to sections 290.210, 290.211 and 290.212, fees should not be charged on a contingent basis for

assurance engagements. Contingent fees may however be used for certain types of non-assurance

engagements . They may, however, give rise to threats to compliance with the fundamental principles in

certain circumstances. They may give rise to a self-interest threat to objectivity. The significance of such

threats will depend on factors including:

(a) The nature of the engagement.

(b) The range of possible fee amounts.

(c) The basis for determining the fee.

(d) Whether the outcome or result of the transaction is to be reviewed by an independent third party.

240.4 The significance of such threats should be evaluated and, if they are other than clearly insignificant,

safeguards should be considered and applied as necessary to eliminate or reduce them to an acceptable

level. Such safeguards may include:

(a) An advance written agreement with the client as to the basis of remuneration.

(b) Disclosure to intended users of the work performed by the professional accountant in public practice and

the basis of remuneration.

(c) Quality control policies and procedures.

(d) Review by an objective third party of the work performed by the professional accountant in public

practice.

Section 240 Fees and Other Types of Remuneration Referral Fees or Commissions

240.5 In certain circumstances, a professional accountant in public practice may receive a referral fee or

commission relating to a client. For example, where the professional accountant in public practice does not

provide the specific service required, a fee may be received for referring a continuing client to another

professional accountant in public practice or other expert. A professional accountant in public practice may

receive a commission from a third party (e.g., a software vendor) in connection with the sale of goods or

services to a client. Accepting such a referral fee or commission may give rise to self-interest threats to


objectivity and professional competence and due care.

240.6 A professional accountant in public practice may also pay a referral fee to obtain a client, for example,

where the client continues as a client of another professional accountant in public practice but requires

specialist services not offered by the existing accountant. The payment of such a referral fee may also

create a self-interest threat to objectivity and professional competence and due care.

240.7 A professional accountant in public practice should not pay or receive a referral fee or commission, unless

the professional accountant in public practice has established safeguards to eliminate the threats or reduce

them to an acceptable level. Such safeguards include:

(a) Disclosing to the client any arrangements to pay a referral fee to another professional accountant for

the work referred.

(b) Disclosing to the client any arrangements to receive a referral fee for referring the client to another

professional accountant in public practice.

(c) Obtaining advance agreement from the client for commission arrangements in connection with the

sale by a third party of goods or services to the client.

240.8 A professional accountant in public practice may purchase all or part of another firm on the basis that

payments will be made to individuals formerly owning the firm or to their heirs or estates. Such payments

are not regarded as commissions or referral fees for the purpose of paragraph 240.5 – 240.7 above.

Section 250 Marketing Public Practice Services

Advertising or marketing services

250.1 When a professional accountant in public practice solicits new work through advertising or other forms of

marketing, there may be potential threats to compliance with the fundamental principles. For example, a

self-interest threat to compliance with the principle of professional behaviour is created if services,

achievements or products are marketed in a way that is inconsistent with that principle.

250.2 A professional accountant in public practice should not bring the profession into disrepute when advertising

or marketing public practice services. The professional accountant in public practice should be honest and

truthful and should:

(a) Not make exaggerated claims for services offered, qualifications possessed or experience gained;

(b) Not make disparaging references to unsubstantiated comparisons to the work of another.

250.3 If the professional accountant in public practice is in doubt whether a proposed form of advertising or

marketing is appropriate, the professional accountant in public practice should seek guidance from the

Institute.

Section 250 Marketing Public Practice Services

Tenders

250.5 A public advertisement or an unsolicited request to make a submission or submit a tender for professional

services may give rise to potential threats to compliance with the fundamental principles. For example, a

self interest threat to professional competence and due care is created if the fee quoted is so low that it

may be difficult to perform the engagement in accordance with applicable technical and professional

standards for that fee.

250.6 A professional accountant in public practice should not respond to advertisements to tender for professional

work unless the professional accountant in public practice has established safeguards to eliminate the

threats or reduce them to an acceptable level. Such safeguards include:

(a) Having sufficiently qualified and skilled staff to undertake the engagement.

(b) Disclosing the basis on which fees are charged and which services are covered by the quoted fee.

(c) If the appointment may result in the replacement of another professional accountant in public

practice, state in the submission or tender that before acceptance, the opportunity to contact the


other professional accountant in public practice is required so that inquiries may be made as to

whether there are professional reasons why the appointment should not be accepted, and if the

submission or tender is successful, contact the existing accountant in accordance with the applicable

provisions in section 210.

Section 260 Gifts and Hospitality

Gifts and Hospitality

260.1 A professional accountant in public practice, or an immediate or close family member, may be offered gifts

and hospitality from a client. Such an offer ordinarily gives rise to threats to compliance with the

fundamental principles. For example, self-interest threats to objectivity may be created if a gift from a client

is accepted; intimidation threats to objectivity may result from the possibility of such offers being made

public.

260.2 The significance of such threats will depend on the nature, value and intent behind the offer. Where gifts or

hospitality which a reasonable and informed third party, having knowledge of all relevant information,

would consider clearly insignificant are made a professional accountant in public practice may conclude that

the offer is made in the normal course of business without the specific intent to influence decision making

or to obtain information. In such cases, the professional accountant in public practice may generally

conclude that there is no significant threat to compliance with the fundamental principles.

260.3 If evaluated threats are other than clearly insignificant, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level. When the threats cannot be eliminated

or reduced to an acceptable level through the application of safeguards, a professional accountant in public

practice should not accept such an offer.

Section 270 Custody of Client Assets

Custody of Client Assets

270.1 A professional accountant in public practice should not assume custody of client monies or other assets

unless permitted to do so by law and, if so, in compliance with any additional legal duties imposed on a

professional accountant in public practice holding such assets.

270.2 The holding of client assets creates threats to compliance with the fundamental principles; for example,

there is a self-interest threat to professional behaviour and may be a self interest threat to objectivity

arising from holding client assets. To safeguard against such threats, a professional accountant in public

practice entrusted with client money or other assets belonging to others should:

(a) Keep such assets separately from personal or firm assets;

(b) Use such assets only for the purpose for which they are intended;

(c) At all times, be ready to account for those assets, and any income, dividends or gains generated, to

any persons entitled to such accounting; and

(d) Comply with all relevant laws and regulations relevant to the holding of and accounting for such

assets.

Please refer to Appendix III for additional guidance on client monies.

270.3 In addition, professional accountants in public practice should be aware of threats to compliance with the

fundamental principles through association with such assets, for example, if the assets were found to derive

from illegal activities, such as money laundering. As part of client and engagement acceptance procedures

for such services, professional accountants in public practice should make appropriate inquiries about the

source of such assets and should consider their legal and regulatory obligations. They may also consider

seeking legal advice.


Section 280 Objectivity–All Services

Objectivity–All Services

280.1 A professional accountant in public practice should consider when providing any professional service

whether there are threats to compliance with the fundamental principle of objectivity resulting from having

interests in, or relationships with, a client or directors, officers or employees. For example, a familiarity

threat to objectivity may be created from a family or close personal or business relationship.

280.2 A professional accountant in public practice who provides an assurance service is required to be

independent of the assurance client. Independence of mind and in appearance is necessary to enable the

professional accountant in public practice to express a conclusion, and be seen to express a conclusion,

without bias, conflict of interest or undue influence of others. Section 290 provides specific guidance on

independence requirements for professional accountants in public practice when performing an assurance

engagement.

280.3 The existence of threats to objectivity when providing any professional service will depend upon the

particular circumstances of the engagement and the nature of the work that the professional accountant in

public practice is performing.

280.4 A professional accountant in public practice should evaluate the significance of identified threats and, if they

are other than clearly insignificant, safeguards should be considered and applied as necessary to eliminate

them or reduce them to an acceptable level. Such safeguards may include:

(a) Withdrawing from the engagement team.

(b) Supervisory procedures.

(c) Terminating the financial or business relationship giving rise to the threat.

(d) Discussing the issue with higher levels of management within the firm.

(e) Discussing the issue with those charged with governance of the client.

Section 290 Independence

Independence - Assurance Engagements

290.1 In the case of an assurance engagement it is in the public interest and, therefore, required by the Institute

pursuant to these By-Laws, that members of assurance teams, firms and, when applicable, network firms,

be independent of assurance clients.

290.2 Assurance engagements are designed to enhance intended users‟ degree of confidence about the outcome

of the evaluation or measurement of a subject matter against criteria. The International Framework for

Assurance Engagements (the Assurance Framework) issued by the International Auditing and Assurance

Standards Board of IFAC describes the elements and objectives of an assurance engagement, and identifies

engagements to which International Standards on Auditing (ISAs), International Standards on Review

Engagements (ISREs) and International Standards on Assurance Engagements (ISAEs) apply. For a

description of the elements and objectives of an assurance engagement reference should be made to the

Assurance Framework.

290.3 As further explained in the Assurance Framework, in an assurance engagement the professional accountant

in public practice expresses a conclusion designed to enhance the degree of confidence of the intended

users other than the responsible party about the outcome of the evaluation or measurement of a subject

matter against criteria.

290.4 The outcome of the evaluation or measurement of a subject matter is the information that results from

applying the criteria to the subject matter. The term “subject matter information” is used to mean the

outcome of the evaluation or measurement of subject matter. For example:

(a) The recognition, measurement, presentation and disclosure represented in the financial statements

(subject matter information) result from applying a financial reporting framework for recognition,

measurement, presentation and disclosure, such as International Financial Reporting Standards,

(criteria) to an entity‟s financial position, financial performance and cash flows (subject matter).


(b) An assertion about the effectiveness of internal control (subject matter information) results from

applying a framework for evaluating the effectiveness of internal control, such as COSO or CoCo,

(criteria) to internal control, a process (subject matter).

290.5 Assurance engagements may be assertion-based or direct reporting. In either case they involve three

separate parties: a professional accountant in public practice, a responsible party and intended users.

290.6 In an assertion-based assurance engagement, which includes a financial statement audit engagement, the

evaluation or measurement of the subject matter is performed by the responsible party, and the subject

matter information is in the form of an assertion by the responsible party that is made available to the

intended users.

290.7 In a direct reporting assurance engagement the professional accountant in public practice either directly

performs the evaluation or measurement of the subject matter, or obtains a representation from the

responsible party that has performed the evaluation or measurement that is not available to the intended

users. The subject matter information is provided to the intended users in the assurance report.

290.8 Independence requires:

(a) Independence of Mind

The state of mind that permits the expression of a conclusion without being affected by influences

that compromise professional judgment, allowing an individual to act with integrity, and exercise

objectivity and professional skepticism.

(b) Independence in Appearance

The avoidance of facts and circumstances that are so significant that a reasonable and informed third

party, having knowledge of all relevant information, including safeguards applied, would reasonably

conclude a firm‟s, or a member of the assurance team‟s, integrity, objectivity or professional

skepticism had been compromised.

290.9 The use of the word “independence” on its own may create misunderstandings. Standing alone, the word

may lead observers to suppose that a person exercising professional judgment ought to be free from all

economic, financial and other relationships. This is impossible, as every member of society has relationships

with others. Therefore, the significance of economic, financial and other relationships should also be

evaluated in the light of what a reasonable and informed third party having knowledge of all relevant

information would reasonably conclude to be unacceptable.

290.10 Many different circumstances, or combination of circumstances, may be relevant and accordingly it is

impossible to define every situation that creates threats to independence and specify the appropriate

mitigating action that should be taken. In addition, the nature of assurance engagements may differ and

consequently different threats may exist, requiring the application of different safeguards. A conceptual

framework that requires firms and members of assurance teams to identify, evaluate and address threats to

independence, rather than merely comply with a set of specific rules which may be arbitrary, is, therefore,

in the public interest.


A Conceptual Approach to Independence

290.11 Members of assurance teams, firms and network firms are required to apply the conceptual framework

contained in Section 100 to the particular circumstances under consideration. In addition to identifying

relationships between the firm, network firms, members of the assurance team and the assurance client,

consideration should be given to whether relationships between individuals outside of the assurance team

and the assurance client create threats to independence.

290.12 The examples presented in this section are intended to illustrate the application of the conceptual

framework and are not intended to be, nor should they be interpreted as, an exhaustive list of all

circumstances that may create threats to independence. Consequently, it is not sufficient for a member of

an assurance team, a firm or a network firm merely to comply with the examples presented, rather they

should apply the framework to the particular circumstances they face.

290.13 The nature of the threats to independence and the applicable safeguards necessary to eliminate the threats

or reduce them to an acceptable level differ depending on the characteristics of the individual assurance

engagement: whether it is a financial statement audit engagement or another type of assurance


engagement; and in the latter case, the purpose, subject matter information and intended users of the

report. A firm should, therefore, evaluate the relevant circumstances, the nature of the assurance

engagement and the threats to independence in deciding whether it is appropriate to accept or continue an

engagement, as well as the nature of the safeguards required and whether a particular individual should be

a member of the assurance team.


Inserted 25 May 2007; With effect from 31 December 2008 for assurance reports dated on or after this date.

Networks and Network Firms

290.14 An entity that belongs to a network might be a firm, which is defined in these By-Laws as a member firm, an entity that controls the member firm through ownership, management or other means and an entity

controlled by the member firm through ownership, management or other means, or the entity might be another type of entity, such as a consulting practice. The independence requirements in this section that

apply to a network firm apply to any entity that meets the definition of a network firm irrespective of

whether the entity itself meets the definition of a firm.

290.15 If a firm is considered to be a network firm, the firm is required to be independent of the financial

statement audit clients of the other firms within the network. In addition, for assurance clients that are not

financial statement audit clients, consideration should be given to any threats the firm has reason to believe may be created by financial interests in the client held by other entities in the network or by relationships

between the client and other entities in the network.

290.16 To enhance their ability to provide professional services, firms frequently form larger structures with other

firms and entities. Whether these larger structures create a network depends upon the particular facts and

circumstances and does not depend on whether the firms and entities are legally separate and distinct. For example, a larger structure may be aimed only at facilitating the referral of work, which in itself does not

meet the criteria necessary to constitute a network. Alternatively, a larger structure might be such that it is aimed at cooperation and the firms share a common brand name, a common system of quality control, or

significant professional resources and consequently is considered to be a network.

290.17 The judgment as to whether the larger structure is a network should be made in light of whether a reasonable and informed third party would be likely to conclude, weighing all the specific facts and

circumstances, that the entities are associated in such a way that a network exists. This judgment should be applied consistently throughout the network.

290.18 Where the larger structure is aimed at co-operation and it is clearly aimed at profit or cost sharing among

the entities within the structure, it is considered to be a network. However, the sharing of immaterial costs would not in itself create a network. In addition, if the sharing of costs is limited only to those costs related

to the development of audit methodologies, manuals, or training courses, this would not in itself create a

network. Further, an association between a firm and an otherwise unrelated entity to jointly provide a service or develop a product would not in itself create a network.

290.19 Where the larger structure is aimed at cooperation and the entities within the structure share common ownership, control or management, it is considered to be a network. This could be achieved by contract or

other means.

290.20 Where the larger structure is aimed at co-operation and the entities within the structure share common quality control policies and procedures, it is considered to be a network. For this purpose common quality

control policies and procedures would be those designed, implemented and monitored across the larger structure.

290.21 Where the larger structure is aimed at co-operation and the entities within the structure share a common

business strategy, it is considered to be a network. Sharing a common business strategy involves an agreement by the entities to achieve common strategic objectives. An entity is not considered to be a

network firm merely because it co-operates with another entity solely to respond jointly to a request for a

proposal for the provision of a professional service.

290.22 Where the larger structure is aimed at co-operation and the entities within the structure share the use of a

common brand name, it is considered to be a network. A common brand name includes common initials or a common name. A firm is considered to be using a common brand name if it includes, for example, the

common brand name as part of, or along with, its firm name, when a partner of the firm signs an assurance

report.


290.23 Even though a firm does not belong to a network and does not use a common brand name as part of its

firm name, it may give the appearance that it belongs to a network if it makes reference in its stationery or promotional materials to being a member of an association of firms. Accordingly, a firm should carefully

consider how it describes any such memberships in order to avoid the perception that it belongs to a network.

290.24 If a firm sells a component of its practice, the sales agreement sometimes provides that, for a limited

period of time, the component may continue to use the name of the firm, or an element of the name, even though it is no longer connected to the firm. In such circumstances, while the two entities may be practicing

under a common name, the facts are such that they do not belong to a larger structure aimed at co-

operation and are, therefore, not network firms. Those entities should carefully consider how to disclose that they are not network firms when presenting themselves to outside parties.

290.25 Where the larger structure is aimed at co-operation and the entities within the structure share a significant part of professional resources, it is considered to be a network. Professional resources include:

• Common systems that enable firms to exchange information such as client data, billing and time

records;

• Partners and staff;

• Technical departments to consult on technical or industry specific issues, transactions or events for

assurance engagements;

• Audit methodology or audit manuals; and

• Training courses and facilities.

290.26 The determination of whether the professional resources shared are significant, and therefore the firms are

network firms, should be made based on the relevant facts and circumstances. Where the shared resources

are limited to common audit methodology or audit manuals, with no exchange of personnel or client or market information, it is unlikely that the shared resources would be considered to be significant. The same

applies to a common training endeavor. Where, however, the shared resources involve the exchange of people or information, such as where staff are drawn from a shared pool, or a common technical

department is created within the larger structure to provide participating firms with technical advice that

the firms are required to follow, a reasonable and informed third party is more likely to conclude that the shared resources are significant.



Financial Statement Audit Engagements

290.27 Financial statement audit engagements are relevant to a wide range of potential users; consequently, in

addition to independence of mind, independence in appearance is of particular significance. Accordingly, for

financial statement audit clients, the members of the assurance team, the firm and network firms are

required to be independent of the financial statement audit client. Such independence requirements include

prohibitions regarding certain relationships between members of the assurance team and directors, officers

and employees of the client in a position to exert direct and significant influence over the subject matter

information (the financial statements). Also, consideration should be given to whether threats to

independence are created by relationships with employees of the client in a position to exert direct and

significant influence over the subject matter (the financial position, financial performance and cash flows).



Other Assertion-based Assurance Engagements

290.28 In an assertion-based assurance engagement where the client is not a financial statement audit client, the

members of the assurance team and the firm are required to be independent of the assurance client (the

responsible party, which is responsible for the subject matter information and may be responsible for the

subject matter). Such independence requirements include prohibitions regarding certain relationships


between members of the assurance team and directors, officers and employees of the client in a position to

exert direct and significant influence over the subject matter information. Also, consideration should be

given to whether threats to independence are created by relationships with employees of the client in a

position to exert direct and significant influence over the subject matter of the engagement. Consideration

should also be given to any threats that the firm has reason to believe may be created by network firm

interests and relationships.

290.29 In the majority of assertion-based assurance engagements, that are not financial statement audit

engagements, the responsible party is responsible for the subject matter information and the subject

matter. However, in some engagements the responsible party may not be responsible for the subject

matter. For example, when a professional accountant in public practice is engaged to perform an assurance

engagement regarding a report that an environmental consultant has prepared about a company‟s

sustainability practices, for distribution to intended users, the environmental consultant is the responsible

party for the subject matter information but the company is responsible for the subject matter (the

sustainability practices).

290.30 In those assertion-based assurance engagements that are not financial statement audit engagements,

where the responsible party is responsible for the subject matter information but not the subject matter the

members of the assurance team and the firm are required to be independent of the party responsible for

the subject matter information (the assurance client). In addition, consideration should be given to any

threats the firm has reason to believe may be created by interests and relationships between a member of

the assurance team, the firm, a network firm and the party responsible for the subject matter.

Section 290 Independence – Assurance Engagements

Direct Reporting Assurance Engagements

290.31 In a direct reporting assurance engagement the members of the assurance team and the firm are required

to be independent of the assurance client (the party responsible for the subject matter).


Restricted Use Reports

290.32 In the case of an assurance report in respect of a non-financial statement audit client expressly restricted

for use by identified users, the users of the report are considered to be knowledgeable as to the purpose,

subject matter information and limitations of the report through their participation in establishing the nature and scope of the firm‟s instructions to deliver the services, including the criteria against which the subject

matter are to be evaluated or measured. This knowledge and the enhanced ability of the firm to communicate about safeguards with all users of the report increase the effectiveness of safeguards to

independence in appearance. These circumstances may be taken into account by the firm in evaluating the

threats to independence and considering the applicable safeguards necessary to eliminate the threats or reduce them to an acceptable level. At a minimum, it will be necessary to apply the provisions of this

section in evaluating the independence of members of the assurance team and their immediate and close family. Further, if the firm had a material financial interest, whether direct or indirect, in the assurance

client, the self-interest threat created would be so significant no safeguard could reduce the threat to an

acceptable level. Limited consideration of any threats created by network firm interests and relationships may be sufficient.


Multiple Responsible Parties

290.33 In some assurance engagements, whether assertion-based or direct reporting, that are not financial

statement audit engagements, there might be several responsible parties. In such engagements, in determining whether it is necessary to apply the provisions in this section to each responsible party, the

firm may take into account whether an interest or relationship between the firm, or a member of the

assurance team, and a particular responsible party would create a threat to independence that is other than


clearly insignificant in the context of the subject matter information. This will take into account factors such

as:

(a) The materiality of the subject matter information (or the subject matter) for which the particular

responsible party is responsible; and

(b) The degree of public interest associated with the engagement.

(c) If the firm determines that the threat to independence created by any such interest or relationship

with a particular responsible party would be clearly insignificant it may not be necessary to apply all

of the provisions of this section to that responsible party.


Other Considerations

290.34 The threats and safeguards identified in this section are generally discussed in the context of interests or relationships between the firm, network firms, members of the assurance team and the assurance client. In

the case of a financial statement audit client that is a listed entity, the firm and any network firms are required to consider the interests and relationships that involve that client‟s related entities. Ideally those

entities and the interests and relationships should be identified in advance. For all other assurance clients,

when the assurance team has reason to believe that a related entity of such an assurance client is relevant to the evaluation of the firm‟s independence of the client, the assurance team should consider that related

entity when evaluating independence and applying appropriate safeguards.

290.35 The evaluation of threats to independence and subsequent action should be supported by evidence obtained

before accepting the engagement and while it is being performed. The obligation to make such an

evaluation and take action arises when a firm, a network firm or a member of the assurance team knows, or could reasonably be expected to know, of circumstances or relationships that might compromise

independence. There may be occasions when the firm, a network firm or an individual inadvertently violates this section. If such an inadvertent violation occurs, it would generally not compromise independence with

respect to an assurance client provided the firm has appropriate quality control policies and procedures in

place to promote independence and, once discovered, the violation is corrected promptly and any necessary safeguards are applied.

290.36 Throughout this section, reference is made to significant and clearly insignificant threats in the evaluation of

independence. In considering the significance of any particular matter, qualitative as well as quantitative factors should be taken into account. A matter should be considered clearly insignificant only if it is deemed

to be both trivial and inconsequential.


Objective and Structure of This Section

290.37 The objective of this section is to assist firms and members of assurance teams in:

(a) Identifying threats to independence;

(b) Evaluating whether these threats are clearly insignificant; and

(c) In cases when the threats are not clearly insignificant, identifying and applying appropriate

safeguards to eliminate or reduce the threats to an acceptable level.

Consideration should always be given to what a reasonable and informed third party having knowledge of

all relevant information, including safeguards applied, would reasonably conclude to be unacceptable. In situations when no safeguards are available to reduce the threat to an acceptable level, the only possible

actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue the

assurance engagement.

290.38 This section concludes with some examples of how this conceptual approach to independence is to be

applied to specific circumstances and relationships. The examples discuss threats to independence that may be created by specific circumstances and relationships (paragraphs 290.100 onwards). Professional

judgment is used to determine the appropriate safeguards to eliminate threats to independence or to

reduce them to an acceptable level. In certain examples, the threats to independence are so significant the only possible actions are to eliminate the activities or interest creating the threat, or to refuse to accept or

continue the assurance engagement. In other examples, the threat can be eliminated or reduced to an acceptable level by the application of safeguards. The examples are not intended to be all-inclusive.


290.39 Certain examples in this section indicate how the framework is to be applied to a financial statement audit

engagement for a listed entity and/or public interest entity. Where there is no differentiation between listed entities and/or public interest entities and other entities, the examples that relate to financial statement

audit engagements for listed entities and/or public interest entities should be considered to apply to all financial statement audit engagements.

290.40 When threats to independence that are not clearly insignificant are identified, and the firm decides to accept

or continue the assurance engagement, the decision should be documented. The documentation should include a description of the threats identified and the safeguards applied to eliminate or reduce the threats

to an acceptable level.

290.41 The evaluation of the significance of any threats to independence and the safeguards necessary to reduce any threats to an acceptable level, takes into account the public interest. Public interest entities are of

significant public interest because, as a result of their business, their size or their corporate status they have a wide range of stakeholders. Because of the strong public interest in the financial statements of listed

entities and/or public interest entities, certain paragraphs in this section deal with additional matters that

are relevant to the financial statement audit of listed entities and/or public interest entities.

290.42 Audit committees can have an important corporate governance role when they are independent of client

management and can assist the Board of Directors in satisfying themselves that a firm is independent in carrying out its audit role. There should be regular communications between the firm and the audit

committee (or other governance body if there is no audit committee) of listed entities regarding

relationships and other matters that might, in the firm‟s opinion, reasonably be thought to bear on independence.

290.43 Firms should establish policies and procedures relating to independence communications with audit committees, or others charged with governance of the client. In the case of the financial statement audit of

listed entities, the firm should communicate orally and in writing at least annually, all relationships and

other matters between the firm, network firms and the financial statement audit client that in the firm‟s professional judgment may reasonably be thought to bear on independence. Matters to be communicated

will vary in each circumstance and should be decided by the firm, but should generally address the relevant

matters set out in this section.


Engagement Period

290.44 The members of the assurance team and the firm should be independent of the assurance client during the

period of the assurance engagement. The period of the engagement starts when the assurance team begins to perform assurance services and ends when the assurance report is issued, except when the assurance

engagement is of a recurring nature. If the assurance engagement is expected to recur, the period of the assurance engagement ends with the notification by either party that the professional relationship has

terminated or the issuance of the final assurance report, whichever is later.

290.45 In the case of a financial statement audit engagement, the engagement period includes the period covered

by the financial statements reported on by the firm. When an entity becomes a financial statement audit

client during or after the period covered by the financial statements that the firm will report on, the firm

should consider whether any threats to independence may be created by:

(a) Financial or business relationships with the audit client during or after the period covered by the

financial statements, but prior to the acceptance of the financial statement audit engagement; or

(b) Previous services provided to the audit client.

Similarly, in the case of an assurance engagement that is not a financial statement audit

engagement, the firm should consider whether any financial or business relationships or previous

services may create threats to independence.

290.46 If a non-assurance service was provided to the financial statement audit client during or after the period covered by the financial statements but before the commencement of professional services in connection

with the financial statement audit and the service would be prohibited during the period of the audit engagement, consideration should be given to the threats to independence, if any, arising from the service.

If the threat is other than clearly insignificant, safeguards should be considered and applied as necessary to

reduce the threat to an acceptable level. Such safeguards may include:

(a) Discussing independence issues related to the provision of the non-assurance service with those

charged with governance of the client, such as the audit committee;

(b) Obtaining the client‟s acknowledgement of responsibility for the results of the non-assurance service;


(c) Precluding personnel who provided the non-assurance service from participating in the financial

statement audit engagement; and

(d) Engaging another firm to review the results of the non-assurance service or having another firm re-

perform the non-assurance service to the extent necessary to enable it to take responsibility for the

service.

290.47 A non-assurance service provided to a non-listed financial statement audit client will not impair the firm‟s independence when the client becomes a listed entity provided:

(a) The previous non-assurance service was permissible under this section for non-listed financial

statement audit clients;

(b) The service will be terminated within a reasonable period of time of the client becoming a listed

entity, if they are impermissible under this section for financial statement audit clients that are listed

entities; and

(c) The firm has implemented appropriate safeguards to eliminate any threats to independence arising

from the previous service or reduce them to an acceptable level.


Application to Specific Situations

Introduction

290.100 The following examples describe specific circumstances and relationships that may create threats to

independence. The examples describe the potential threats created and the safeguards that may be appropriate to eliminate the threats or reduce them to an acceptable level in each circumstance. The

examples are not all inclusive. In practice, the firm, network firms and the members of the assurance

team will be required to assess the implications of similar, but different, circumstances and relationships and to determine whether safeguards, including the safeguards in paragraphs 200.12 through 200.15 can

be applied to satisfactorily address the threats to independence.

290.101 Some of the examples deal with financial statement audit clients while others deal with assurance

engagements for clients that are not financial statement audit clients. The examples illustrate how

safeguards should be applied to fulfill the requirement for the members of the assurance team, the firm and network firms to be independent of a financial statement audit client, and for the members of the

assurance team and the firm to be independent of an assurance client that is not a financial statement audit client. The examples do not include assurance reports to a non-financial statement audit client

expressly restricted for use by identified users. As stated in paragraph 290.19 for such engagements,

members of the assurance team and their immediate and close family are required to be independent of the assurance client. Further, the firm should not have a material financial interest, direct or indirect, in

the assurance client.

290.102 The examples illustrate how the framework applies to financial statement audit clients and other

assurance clients. The examples should be read in conjunction with paragraphs 290.20 which explain

that, in the majority of assurance engagements, there is one responsible party and that responsible party comprises the assurance client. However, in some assurance engagements there are two responsible

parties. In such circumstances, consideration should be given to any threats the firm has reason to

believe may be created by interests and relationships between a member of the assurance team, the firm, a network firm and the party responsible for the subject matter.

290.103 Please refer to Appendix IV (pages 141-146) for further guidance on the application of the independence requirements contained in this section to assurance engagements that are not financial statement audit

engagements.


Financial Interests

290.104 A financial interest in an assurance client may create a self-interest threat. In evaluating the significance

of the threat, and the appropriate safeguards to be applied to eliminate the threat or reduce it to an

acceptable level, it is necessary to examine the nature of the financial interest. This includes an evaluation of the role of the person holding the financial interest, the materiality of the financial interest


and the type of financial interest (direct or indirect).

290.105 When evaluating the type of financial interest, consideration should be given to the fact that financial interests range from those where the individual has no control over the investment vehicle or the

financial interest held (e.g., a mutual fund, unit trust or similar intermediary vehicle) to those where the individual has control over the financial interest (e.g., as a trustee) or is able to influence investment

decisions. In evaluating the significance of any threat to independence, it is important to consider the

degree of control or influence that can be exercised over the intermediary, the financial interest held, or its investment strategy. When control exists, the financial interest should be considered direct.

Conversely, when the holder of the financial interest has no ability to exercise such control the financial

interest should be considered indirect.


Financial Interests

Provisions Applicable to All Assurance Clients

290.106 If a member of the assurance team, or their immediate family member, has a direct financial interest, or

a material indirect financial interest, in the assurance client, the self-interest threat created would be so significant the only safeguards available to eliminate the threat or reduce it to an acceptable level would

be to:

(a) Dispose of the direct financial interest prior to the individual becoming a member of the assurance

team;

(b) Dispose of the indirect financial interest in total or dispose of a sufficient amount of it so that the

remaining interest is no longer material prior to the individual becoming a member of the

assurance team; or

(c) Remove the member of the assurance team from the assurance engagement.

290.107 (1) If a member of the assurance team, or their immediate family member receives, by way of, for

example, an inheritance, gift or, as a result of a merger, a direct financial interest or a material

indirect financial interest in the assurance client, a self-interest threat would be created. The

following safeguards should be applied to eliminate the threat or reduce it to an acceptable level:

(a) Disposing of the financial interest at the earliest practical date; or

(b) Removing the member of the assurance team from the assurance engagement.

(2) During the period prior to disposal of the financial interest or the removal of the individual from the

assurance team, consideration should be given to whether additional safeguards are necessary to

reduce the threat to an acceptable level. Such safeguards might include:

(a) Discussing the matter with those charged with governance, such as the audit committee; or

(b) Involving an additional professional accountant to review the work done, or otherwise advise

as necessary.

290.108 When a member of the assurance team knows that his or her close family member has a direct financial

interest or a material indirect financial interest in the assurance client, a self-interest threat may be

created. In evaluating the significance of any threat, consideration should be given to the nature of the

relationship between the member of the assurance team and the close family member and the

materiality of the financial interest. Once the significance of the threat has been evaluated, safeguards

should be considered and applied as necessary. Such safeguards might include:

(a) The close family member disposing of all or a sufficient portion of the financial interest at the

earliest practical date;

(b) Discussing the matter with those charged with governance, such as the audit committee;

(c) Involving an additional professional accountant who did not take part in the assurance engagement

to review the work done by the member of the assurance team with the close family relationship or

otherwise advise as necessary; or


(d) Removing the individual from the assurance engagement.

290.109 When a firm or a member of the assurance team holds a direct financial interest or a material indirect

financial interest in the assurance client as a trustee, a self-interest threat may be created by the

possible influence of the trust over the assurance client. Accordingly, such an interest should only be held

when:

(a) The member of the assurance team, an immediate family member of the member of the assurance

team, and the firm are not beneficiaries of the trust;

(b) The interest held by the trust in the assurance client is not material to the trust;

(c) The trust is not able to exercise significant influence over the assurance client; and

(d) The member of the assurance team or the firm does not have significant influence over any

investment decision involving a financial interest in the assurance client.

290.110 (1) Consideration should be given to whether a self-interest threat may be created by the financial

interests of individuals outside of the assurance team and their immediate and close family

members. Such individuals would include:

(a) Partners, and their immediate family members, who are not members of the assurance team;

(b) Partners and managerial employees who provide non-assurance services to the assurance

client; and

(c) Individuals who have a close personal relationship with a member of the assurance team.

(2) Whether the interests held by such individuals may create a self-interest threat will depend upon

factors such as:

(a) The firm‟s organizational, operating and reporting structure; and

(b) The nature of the relationship between the individual and the member of the assurance team.

(3) The significance of the threat should be evaluated and, if the threat is other than clearly

insignificant, safeguards should be considered and applied as necessary to reduce the threat to an

acceptable level. Such safeguards might include:

(a) Where appropriate, policies to restrict people from holding such interests;

(b) Discussing the matter with those charged with governance, such as the audit committee; or

(c) Involving an additional professional accountant who did not take part in the assurance

engagement to review the work done or otherwise advise as necessary.

290.111 An inadvertent violation of this section as it relates to a financial interest in an assurance client would not

impair the independence of the firm, the network firm or a member of the assurance team when:

(a) The firm, and the network firm, have established policies and procedures that require all

professionals to report promptly to the firm any breaches resulting from the purchase, inheritance

or other acquisition of a financial interest in the assurance client;

(b) The firm, and the network firm, promptly notify the professional that the financial interest should

be disposed of; and

(c) The disposal occurs at the earliest practical date after identification of the issue, or the professional

is removed from the assurance team.

290.112 When an inadvertent violation of this section relating to a financial interest in an assurance client has

occurred, the firm should consider whether any safeguards should be applied. Such safeguards might

include:

(a) Involving an additional professional accountant who did not take part in the assurance engagement

to review the work done by the member of the assurance team; or

(b) Excluding the individual from any substantive decision-making concerning the assurance

engagement.



Financial Interests

Provisions Applicable to Financial Statement Audit Clients

290.113 If a firm, or a network firm, has a direct financial interest in a financial statement audit client of the firm

the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to

permit the firm to perform the engagement.

290.114 If a firm, or a network firm, has a material indirect financial interest in a financial statement audit client

of the firm a self-interest threat is also created. The only actions appropriate to permit the firm to

perform the engagement would be for the firm, or the network firm, either to dispose of the indirect

interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer

material.

290.115 If a firm, or a network firm, has a material financial interest in an entity that has a controlling interest in

a financial statement audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only actions appropriate to permit the firm to perform

the engagement would be for the firm, or the network firm, either to dispose of the financial interest in

total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

290.116 If the retirement benefit plan of a firm, or network firm, has a financial interest in a financial statement

audit client a self-interest threat may be created. Accordingly, the significance of any such threat created should be evaluated and, if the threat is other than clearly insignificant, safeguards should be considered

and applied as necessary to eliminate the threat or reduce it to an acceptable level.

290.117 If other partners, including partners who do not perform assurance engagements, or their immediate family, in the office in which the engagement partner practices in connection with the financial statement

audit hold a direct financial interest or a material indirect financial interest in that audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable

level. Accordingly, such partners or their immediate family should not hold any such financial interests in

such an audit client.

290.118 The office in which the engagement partner practices in connection with the financial statement audit is

not necessarily the office to which that partner is assigned. Accordingly, when the engagement partner is located in a different office from that of the other members of the assurance team, judgment should be

used to determine in which office the partner practices in connection with that audit.

290.119 If other partners and managerial employees who provide non-assurance services to the financial statement audit client, except those whose involvement is clearly insignificant, or their immediate family,

hold a direct financial interest or a material indirect financial interest in the audit client, the self-interest

threat created would be so significant no safeguard could reduce the threat to an acceptable level. Accordingly, such personnel or their immediate family should not hold any such financial interests in such

an audit client.

290.120 A financial interest in a financial statement audit client that is held by an immediate family member of:

(a) a partner located in the office in which the engagement partner practices in connection with the

audit; or

(b) a partner or managerial employee who provides non-assurance services to the audit client;

is not considered to create an unacceptable threat provided it is received as a result of their employment rights (e.g., pension rights or share options) and, where necessary, appropriate safeguards are applied to

reduce any threat to independence to an acceptable level.

290.121 A self-interest threat may be created if the firm, or the network firm, or a member of the assurance team has an interest in an entity and a financial statement audit client, or a director, officer or controlling

owner thereof also has an investment in that entity. Independence is not compromised with respect to the audit client if the respective interests of the firm, the network firm, or member of the assurance

team, and the audit client, or director, officer or controlling owner thereof are both immaterial and the

audit client cannot exercise significant influence over the entity. If an interest is material, to the firm, the network firm or the audit client, and the audit client can exercise significant influence over the entity, no

safeguards are available to reduce the threat to an acceptable level and the firm, or the network firm, should either dispose of the interest or decline the audit engagement. Any member of the assurance

team with such a material interest should either:

(a) Dispose of the interest;

(b) Dispose of a sufficient amount of the interest so that the remaining interest is no longer material;


or

(c) Withdraw from the audit.


Financial Interests

Provisions Applicable to Non-Financial Statement Audit Assurance Clients

290.122 If a firm has a direct financial interest in an assurance client that is not a financial statement audit client the self-interest threat created would be so significant no safeguard could reduce the threat to an

acceptable level. Consequently, disposal of the financial interest would be the only action appropriate to

permit the firm to perform the engagement.

290.123 If a firm has a material indirect financial interest in an assurance client that is not a financial statement

audit client a self-interest threat is also created. The only action appropriate to permit the firm to

perform the engagement would be for the firm to either dispose of the indirect interest in total or to

dispose of a sufficient amount of it so that the remaining interest is no longer material.

290.124 If a firm has a material financial interest in an entity that has a controlling interest in an assurance client

that is not a financial statement audit client, the self-interest threat created would be so significant no safeguard could reduce the threat to an acceptable level. The only action appropriate to permit the firm

to perform the engagement would be for the firm either to dispose of the financial interest in total or to dispose of a sufficient amount of it so that the remaining interest is no longer material.

290.125 When a restricted use report for an assurance engagement that is not a financial statement audit

engagement is issued, exceptions to the provisions in paragraphs 290.106 through 290.110 and 290.122 through 290.124 are set out in 290.19.


Loans and Guarantees

290.126 Subject to the provisions of any written law, a loan, or a guarantee of a loan, to the firm from an assurance client that is a bank or a similar institution, would not create a threat to independence

provided the loan, or guarantee, is made under normal lending procedures, terms and requirements and the loan is immaterial to both the firm and the assurance client. If the loan is material to the assurance

client or the firm it may be possible, through the application of safeguards, to reduce the self-interest

threat created to an acceptable level. Such safeguards might include involving an additional professional accountant from outside the firm, or network firm, to review the work performed.

290.127 A loan, or a guarantee of a loan, from an assurance client that is a bank or a similar institution, to a

member of the assurance team or their immediate family would not create a threat to independence

provided the loan, or guarantee, is made under normal lending procedures, terms and requirements.

Examples of such loans include home mortgages, bank overdrafts, car loans and credit card balances.

290.128 Similarly, deposits made by, or brokerage accounts of, a firm or a member of the assurance team with an

assurance client that is a bank, broker or similar institution would not create a threat to independence

provided the deposit or account is held under normal commercial terms.

290.129 If the firm, or a member of the assurance team, makes a loan to an assurance client, that is not a bank

or similar institution, or guarantees such an assurance client‟s borrowing, the self-interest threat created

would be so significant no safeguard could reduce the threat to an acceptable level, unless the loan or

guarantee is immaterial to both the firm or the member of the assurance team and the assurance client.

290.130 Similarly, if the firm or a member of the assurance team accepts a loan from, or has borrowing

guaranteed by, an assurance client that is not a bank or similar institution, the self-interest threat

created would be so significant no safeguard could reduce the threat to an acceptable level, unless the

loan or guarantee is immaterial to both the firm or the member of the assurance team and the assurance

client.

290.131 The examples in paragraphs 290.126 through 290.130 relate to loans and guarantees between the firm

and an assurance client. In the case of a financial statement audit engagement, the provisions should be

applied to the firm, all network firms and the audit client.



Close Business Relationships With Assurance Clients

290.132 (1) A close business relationship between a firm or a member of the assurance team and the assurance client or its management, or between the firm, a network firm and a financial statement audit

client, will involve a commercial or common financial interest and may create self-interest and

intimidation threats. The following are examples of such relationships:

(a) Having a material financial interest in a joint venture with the assurance client or a controlling

owner, director, officer or other individual who performs senior managerial functions for that

client.

(b) Arrangements to combine one or more services or products of the firm with one or more

services or products of the assurance client and to market the package with reference to both

parties.

(c) Distribution or marketing arrangements under which the firm acts as a distributor or

marketer of the assurance client‟s products or services, or the assurance client acts as the

distributor or marketer of the products or services of the firm.

(2) In the case of a financial statement audit client, unless the financial interest is immaterial and the

relationship is clearly insignificant to the firm, the network firm and the audit client, no safeguards

could reduce the threat to an acceptable level. In the case of an assurance client that is not a

financial statement audit client, unless the financial interest is immaterial and the relationship is

clearly insignificant to the firm and the assurance client, no safeguards could reduce the threat to

an acceptable level.

(3) Consequently, in both these circumstances the only possible courses of action are to:

(a) Terminate the business relationship;

(b) Reduce the magnitude of the relationship so that the financial interest is immaterial and the

relationship is clearly insignificant; or

(c) Refuse to perform the assurance engagement.

(4) Unless any such financial interest is immaterial and the relationship is clearly insignificant to the

member of the assurance team, the only appropriate safeguard would be to remove the individual

from the assurance team.

290.133 In the case of a financial statement audit client, business relationships involving an interest held by the

firm, a network firm or a member of the assurance team or their immediate family in a closely held entity

when the audit client or a director or officer of the audit client, or any group thereof, also has an interest

in that entity, do not create threats to independence provided:

(a) The relationship is clearly insignificant to the firm, the network firm and the audit client;

(b) The interest held is immaterial to the investor, or group of investors; and

(c) The interest does not give the investor, or group of investors, the ability to control the closely held

entity.

290.134 The purchase of goods and services from an assurance client by the firm (or from a financial statement

audit client by a network firm) or a member of the assurance team would not generally create a threat to

independence providing the transaction is in the normal course of business and on an arm‟s length basis.

However, such transactions may be of a nature or magnitude so as to create a self-interest threat. If the

threat created is other than clearly insignificant, safeguards should be considered and applied as

necessary to reduce the threat to an acceptable level. Such safeguards might include:

(a) Eliminating or reducing the magnitude of the transaction;

(b) Removing the individual from the assurance team; or

(c) Discussing the issue with those charged with governance, such as the audit committee.



Family and Personal Relationships

290.135 Family and personal relationships between a member of the assurance team and a director, an officer or

certain employees, depending on their role, of the assurance client, may create self-interest, familiarity or

intimidation threats. It is impracticable to attempt to describe in detail the significance of the threats that

such relationships may create. The significance will depend upon a number of factors including the

individual‟s responsibilities on the assurance engagement, the closeness of the relationship and the role

of the family member or other individual within the assurance client. Consequently, there is a wide

spectrum of circumstances that will need to be evaluated and safeguards to be applied to reduce the

threat to an acceptable level.

290.136 When an immediate family member of a member of the assurance team is a director, an officer or an

employee of the assurance client in a position to exert direct and significant influence over the subject

matter information of the assurance engagement, or was in such a position during any period covered by

the engagement, the threats to independence can only be reduced to an acceptable level by removing the

individual from the assurance team. The closeness of the relationship is such that no other safeguard

could reduce the threat to independence to an acceptable level. If application of this safeguard is not

used, the only course of action is to withdraw from the assurance engagement. For example, in the case

of an audit of financial statements, if the spouse of a member of the assurance team is an employee in a

position to exert direct and significant influence over the preparation of the audit client‟s accounting

records or financial statements, the threat to independence could only be reduced to an acceptable level

by removing the individual from the assurance team.

290.137 (1) When an immediate family member of a member the assurance team is an employee in a position

to exert direct and significant influence over the subject matter of the engagement, threats to

independence may be created. The significance of the threats will depend on factors such as:

(a) The position the immediate family member holds with the client; and

(b) The role of the professional on the assurance team.




(a) Removing the individual from the assurance team;

(b) Where possible, structuring the responsibilities of the assurance team so that the professional

does not deal with matters that are within the responsibility of the immediate family member;

or

(c) Policies and procedures to empower staff to communicate to senior levels within the firm any

issue of independence and objectivity that concerns them.

290.138 (1) When a close family member of a member of the assurance team is a director, an officer, or an

employee of the assurance client in a position to exert direct and significant influence over the

subject matter information of the assurance engagement, threats to independence may be created.

The significance of the threats will depend on factors such as:

(a) The position the close family member holds with the client; and

(b) The role of the professional on the assurance team.




(a) Removing the individual from the assurance team;

(b) Where possible, structuring the responsibilities of the assurance team so that the professional

does not deal with matters that are within the responsibility of the close family member; or

(c) Policies and procedures to empower staff to communicate to senior levels within the firm any

issue of independence and objectivity that concerns them.


290.139 In addition, self-interest, familiarity or intimidation threats may be created when a person who is other

than an immediate or close family member of a member of the assurance team has a close relationship

with the member of the assurance team and is a director, an officer or an employee of the assurance

client in a position to exert direct and significant influence over the subject matter information of the

assurance engagement. Therefore, members of the assurance team are responsible for identifying any

such persons and for consulting in accordance with firm procedures. The evaluation of the significance of

any threat created and the safeguards appropriate to eliminate the threat or reduce it to an acceptable

level will include considering matters such as the closeness of the relationship and the role of the

individual within the assurance client.

290.140 Consideration should be given to whether self-interest, familiarity or intimidation threats may be created

by a personal or family relationship between a partner or employee of the firm who is not a member of

the assurance team and a director, an officer or an employee of the assurance client in a position to exert

direct and significant influence over the subject matter information of the assurance engagement.

Therefore partners and employees of the firm are responsible for identifying any such relationships and

for consulting in accordance with firm procedures. The evaluation of the significance of any threat created

and the safeguards appropriate to eliminate the threat or reduce it to an acceptable level will include

considering matters such as the closeness of the relationship, the interaction of the firm professional with

the assurance team, the position held within the firm, and the role of the individual within the assurance

client.

290.141 An inadvertent violation of this section as it relates to family and personal relationships would not impair

the independence of a firm or a member of the assurance team when:

(a) The firm has established policies and procedures that require all professionals to report promptly to

the firm any breaches resulting from changes in the employment status of their immediate or close

family members or other personal relationships that create threats to independence;

(b) Either the responsibilities of the assurance team are re-structured so that the professional does not

deal with matters that are within the responsibility of the person with whom he or she is related or

has a personal relationship, or, if this is not possible, the firm promptly removes the professional

from the assurance engagement; and

(c) Additional care is given to reviewing the work of the professional.

290.142 When an inadvertent violation of this section relating to family and personal relationships has occurred,

the firm should consider whether any safeguards should be applied. Such safeguards might include:

(a) Involving an additional professional accountant who did not take part in the assurance engagement

to review the work done by the member of the assurance team; or

(b) Excluding the individual from any substantive decision-making concerning the assurance

engagement.


Employment with Assurance Clients

290.143 A firm or a member of the assurance team‟s independence may be threatened if a director, an officer or

an employee of the assurance client in a position to exert direct and significant influence over the subject

matter information of the assurance engagement has been a member of the assurance team or partner

of the firm. Such circumstances may create self-interest, familiarity and intimidation threats particularly

when significant connections remain between the individual and his or her former firm. Similarly, a

member of the assurance team‟s independence may be threatened when an individual participates in the

assurance engagement knowing, or having reason to believe, that he or she is to, or may, join the

assurance client some time in the future.

290.144 (1) If a member of the assurance team, partner or former partner of the firm has joined the assurance

client, the significance of the self-interest, familiarity or intimidation threats created will depend

upon the following factors:

(a) The position the individual has taken at the assurance client.


(b) The amount of any involvement the individual will have with the assurance team.

(c) The length of time that has passed since the individual was a member of the assurance team

or firm.

(d) The former position of the individual within the assurance team or firm.




(a) Considering the appropriateness or necessity of modifying the assurance plan for the

assurance engagement;

(b) Assigning an assurance team to the subsequent assurance engagement that is of sufficient

experience in relation to the individual who has joined the assurance client;

(c) Involving an additional professional accountant who was not a member of the assurance

team to review the work done or otherwise advise as necessary; or

(d) Quality control review of the assurance engagement.

(3) In all cases, all of the following safeguards are necessary to reduce the threat to an acceptable

level:

(a) The individual concerned is not entitled to any benefits or payments from the firm unless

these are made in accordance with fixed pre-determined arrangements. In addition, any

amount owed to the individual should not be of such significance to threaten the firm‟s

independence.

(b) The individual does not continue to participate or appear to participate in the firm‟s business

or professional activities.

(c) Where a former engagement partner of the firm who was responsible for the assurance

engagement, has joined the board of the assurance client, at least two years has elapsed

since the date of the assurance report for which such former engagement partner was

responsible.

290.145 A self-interest threat is created when a member of the assurance team participates in the assurance

engagement while knowing, or having reason to believe, that he or she is to, or may, join the assurance

client some time in the future. This threat can be reduced to an acceptable level by the application of all

of the following safeguards:

(a) Policies and procedures to require the individual to notify the firm when entering serious

employment negotiations with the assurance client.

(b) Removal of the individual from the assurance engagement.

(c) In addition, consideration should be given to performing an independent review of any significant

judgments made by that individual while on the engagement.


Recent Service with Assurance Clients

290.146 To have a former officer, director or employee of the assurance client serve as a member of the

assurance team may create self-interest, self-review and familiarity threats. This would be particularly

true when a member of the assurance team has to report on, for example, subject matter information he

or she had prepared or elements of the financial statements he or she had valued while with the

assurance client.

290.147 If, during the period covered by the assurance report, a member of the assurance team had served as an

officer or director of the assurance client, or had been an employee in a position to exert direct and

significant influence over the subject matter information of the assurance engagement, the threat created

would be so significant no safeguard could reduce the threat to an acceptable level. Consequently, such

individuals should not be assigned to the assurance team.


290.148 (1) If, prior to the period covered by the assurance report, a member of the assurance team had

served as an officer or director of the assurance client, or had been an employee in a position to

exert direct and significant influence over the subject matter information of the assurance

engagement, this may create self-interest, self-review and familiarity threats. For example, such

threats would be created if a decision made or work performed by the individual in the prior period,

while employed by the assurance client, is to be evaluated in the current period as part of the

current assurance engagement. The significance of the threats will depend upon factors such as:

(a) The position the individual held with the assurance client;

(b) The length of time that has passed since the individual left the assurance client; and

(c) The role the individual plays on the assurance team.




(a) Involving an additional professional accountant to review the work done by the individual as

part of the assurance team or otherwise advise as necessary; or

(b) Discussing the issue with those charged with governance, such as the audit committee.


Serving as an Officer or Director on the Board of Assurance Clients

290.149 If a partner or employee of the firm serves as an officer or as a director on the board of an assurance

client or as a liquidator, provisional liquidator, receiver, receiver and manager, special administrator or

persons of like description the self-review and self-interest threats created would be so significant no

safeguard could reduce the threats to an acceptable level. In the case of a financial statement audit

engagement, if a partner or employee of a network firm were to serve as an officer or as a director on the

board of the audit client the threats created would be so significant no safeguard could reduce the threats

to an acceptable level. Consequently, if such an individual were to accept such a position the only course

of action is to refuse to perform, or to withdraw from the assurance engagement.

290.150 [This section is intentionally kept blank]




Long Association of Senior Personnel With Assurance Clients

General Provisions

290.153 (1) Using the same senior personnel on an assurance engagement over a long period of time may

create a familiarity threat. The significance of the threat will depend upon factors such as:

(a) The length of time that the individual has been a member of the assurance team;

(b) The role of the individual on the assurance team;

(c) The structure of the firm; and

(d) The nature of the assurance engagement.


insignificant, safeguards should be considered and applied to reduce the threat to an acceptable

level. Such safeguards might include:


(a) Rotating the senior personnel off the assurance team;

(b) Involving an additional professional accountant who was not a member of the assurance

team to review the work done by the senior personnel or otherwise advise as necessary; or

(c) Independent internal quality reviews.


Long Association of Senior Personnel With Assurance Clients

Financial Statement Audit Clients that are Listed Entities or Public Interest Entities

290.154 Using the same engagement partner or the same individual responsible for the engagement quality

control review on a financial statement audit over a prolonged period may create a familiarity threat. This

threat is particularly relevant in the context of the financial statement audit of a listed entity or public

interest entity and safeguards should be applied in such situations to reduce such threat to an acceptable

level. Accordingly in respect of the financial statement audit of listed entities and public interest entities:

(a) The engagement partner and the individual responsible for the engagement quality control review

should be rotated after serving in either capacity, or a combination thereof, for a period, no more

than five years; and

(b) Such an individual rotating after such period should not participate in the audit engagement until a

further period of two years, has elapsed.

290.155 When a financial statement audit client becomes a listed entity the length of time the engagement

partner or the individual responsible for the engagement quality control review has served the audit client

in that capacity should be considered in determining when the individual should be rotated. However, the

person may continue to serve as the engagement partner or as the individual responsible for the

engagement quality control review for two additional years before rotating off the engagement.

290.156 (1) While the engagement partner and the individual responsible for the engagement quality control

review should be rotated after such a pre-defined period, some degree of flexibility over timing of

rotation may be necessary in certain circumstances. Examples of such circumstances include:

(a) Situations when the person‟s continuity is especially important to the financial statement

audit client, for example, when there will be major changes to the audit client‟s structure that

would otherwise coincide with the rotation of the person‟s;

(b) Situations when, due to the size of the firm, rotation is not possible or does not constitute an

appropriate safeguard; and

(c) Situations when a regulatory authority empowered by law expressly allows such flexibility.

(2) In all such circumstances when the person is not rotated after such a pre-defined period equivalent

safeguards should be applied to reduce any threats to an acceptable level.

290.157 When a firm has only a few people with the necessary knowledge and experience to serve as engagement

partner or individual responsible for the engagement quality control review on a financial statement audit

client that is a listed entity or public interest entity, rotation may not be an appropriate safeguard. In

these circumstances the firm should apply other safeguards to reduce the threat to an acceptable level.

Such safeguards would include involving an additional professional accountant who was not otherwise

associated with the assurance team to review the work done or otherwise advise as necessary. This

individual could be someone from outside the firm or someone within the firm who was not otherwise

associated with the assurance team.


Provision of Non-assurance Services to Assurance Clients

290.158 Firms have traditionally provided to their assurance clients a range of non-assurance services that are

consistent with their skills and expertise. Assurance clients value the benefits that derive from having


these firms, which have a good understanding of the business, bring their knowledge and skill to bear in

other areas. Furthermore, the provision of such non-assurance services will often result in the assurance

team obtaining information regarding the assurance client‟s business and operations that is helpful in

relation to the assurance engagement. The greater the knowledge of the assurance client‟s business, the

better the assurance team will understand the assurance client‟s procedures and controls, and the

business and financial risks that it faces. The provision of non-assurance services may, however, create

threats to the independence of the firm, a network firm or the members of the assurance team,

particularly with respect to perceived threats to independence. Consequently, it is necessary to evaluate

the significance of any threat created by the provision of such services. In some cases it may be possible

to eliminate or reduce the threat created by application of safeguards. In other cases no safeguards are

available to reduce the threat to an acceptable level.

290.159 The following activities would generally create self-interest or self-review threats that are so significant

that only avoidance of the activity or refusal to perform the assurance engagement would reduce the

threats to an acceptable level:

(a) Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf

of the assurance client, or having the authority to do so.

(b) Determining which recommendation of the firm should be implemented.

(c) Reporting, in a management role, to those charged with governance.

(d) as a court appointed liquidator, provisional liquidator, receiver, receiver and manager, special

administrator or persons of like description, of the assurance client within the previous two (2)

years.

290.160 The subsequent examples are addressed in the context of the provision of non-assurance services to an

assurance client. The potential threats to independence will most frequently arise when a non-assurance

service is provided to a financial statement audit client. The financial statements of an entity provide

financial information about a broad range of transactions and events that have affected the entity. The

subject matter information of other assurance services, however, may be limited in nature. Threats to

independence, however, may also arise when a firm provides a non-assurance service related to the

subject matter information, of a non-financial statement audit assurance engagement. In such cases,

consideration should be given to the significance of the firm‟s involvement with the subject matter

information, of the engagement, whether any self-review threats are created and whether any threats to

independence could be reduced to an acceptable level by application of safeguards, or whether the

engagement should be declined. When the non-assurance service is not related to the subject matter

information, of the non-financial statement audit assurance engagement, the threats to independence will

generally be clearly insignificant.

290.161 (1) The following activities may also create self-review or self-interest threats:

(a) Having custody of an assurance client‟s assets.

(b) Supervising assurance client employees in the performance of their normal recurring

activities.

(c) Preparing source documents or originating data, in electronic or other form, evidencing the

occurrence of a transaction (for example, purchase orders, payroll time records, and

customer orders).

(2) The significance of any threat created should be evaluated and, if the threat is other than clearly

insignificant, safeguards should be considered and applied as necessary to eliminate the threat or

reduce it to an acceptable level. Such safeguards might include:

(a) Making arrangements so that personnel providing such services do not participate in the

assurance engagement;

(b) Involving an additional professional accountant to advise on the potential impact of the

activities on the independence of the firm and the assurance team; or

(c) Other relevant safeguards set out in national regulations.

290.162 New developments in business, the evolution of financial markets, rapid changes in information


technology, and the consequences for management and control, make it impossible to draw up an all-

inclusive list of all situations when providing non-assurance services to an assurance client might create

threats to independence and of the different safeguards that might eliminate these threats or reduce

them to an acceptable level. In general, however, a firm may provide services beyond the assurance

engagement provided any threats to independence have been reduced to an acceptable level.

290.163 The following safeguards may be particularly relevant in reducing to an acceptable level threats created

by the provision of non-assurance services to assurance clients:

(a) Policies and procedures to prohibit professional staff from making management decisions for the

assurance client, or assuming responsibility for such decisions.

(b) Discussing independence issues related to the provision of non-assurance services with those

charged with governance, such as the audit committee.

(c) Policies within the assurance client regarding the oversight responsibility for provision of non-

assurance services by the firm.

(d) Involving an additional professional accountant to advise on the potential impact of the non-

assurance engagement on the independence of the member of the assurance team and the firm.

(e) Involving an additional professional accountant outside of the firm to provide assurance on a

discrete aspect of the assurance engagement.

(f) Obtaining the assurance client‟s acknowledgement of responsibility for the results of the work

performed by the firm.

(g) Disclosing to those charged with governance, such as the audit committee, the nature and extent of

fees charged.

(h) Making arrangements so that personnel providing non-assurance services do not participate in the

assurance engagement.

290.164 Before the firm accepts an engagement to provide a non-assurance service to an assurance client,

consideration should be given to whether the provision of such a service would create a threat to

independence. In situations when a threat created is other than clearly insignificant, the non-assurance

engagement should be declined unless appropriate safeguards can be applied to eliminate the threat or

reduce it to an acceptable level.

290.165 The provision of certain non-assurance services to financial statement audit clients may create threats to

independence so significant that no safeguard could eliminate the threat or reduce it to an acceptable

level. However, the provision of such services to a related entity, division or discrete financial statement

item of such clients may be permissible when any threats to the firm‟s independence have been reduced

to an acceptable level by arrangements for that related entity, division or discrete financial statement

item to be audited by another firm or when another firm re-performs the non-assurance service to the

extent necessary to enable it to take responsibility for that service.



Preparing Accounting Records and Financial Statements

290.166 Assisting a financial statement audit client in matters such as preparing accounting records or financial

statements may create a self-review threat when the financial statements are subsequently audited by

the firm.

290.167 It is the responsibility of financial statement audit client management to ensure that accounting records

are kept and financial statements are prepared, although they may request the firm to provide

assistance. If firm, or network firm, personnel providing such assistance make management decisions,

the self-review threat created could not be reduced to an acceptable level by any safeguards.

Consequently, personnel should not make such decisions. Examples of such managerial decisions include:

(a) Determining or changing journal entries, or the classifications for accounts or transaction or other

accounting records without obtaining the approval of the financial statement audit client;


(b) Authorizing or approving transactions; and

(c) Preparing source documents or originating data (including decisions on valuation assumptions), or

making changes to such documents or data.

290.168 The audit process involves extensive dialogue between the firm and management of the financial

statement audit client. During this process, management requests and receives significant input

regarding such matters as accounting principles and financial statement disclosure, the appropriateness

of controls and the methods used in determining the stated amounts of assets and liabilities. Technical

assistance of this nature and advice on accounting principles for financial statement audit clients are an

appropriate means to promote the fair presentation of the financial statements. The provision of such

advice does not generally threaten the firm‟s independence. Similarly, the financial statement audit

process may involve assisting an audit client in resolving account reconciliation problems, analyzing and

accumulating information for regulatory reporting, assisting in the preparation of consolidated financial

statements (including the translation of local statutory accounts to comply with group accounting policies

and the transition to a different reporting framework such as International Financial Reporting

Standards), drafting disclosure items, proposing adjusting journal entries and providing assistance and

advice in the preparation of local statutory accounts of subsidiary entities. These services are considered

to be a normal part of the audit process and do not, under normal circumstances, threaten independence.




General Provisions

290.169 The subsequent examples indicate that self-review threats may be created if the firm is involved in the

preparation of accounting records or financial statements and those financial statements are subsequently

the subject matter information of an audit engagement of the firm. This notion may be equally applicable

in situations when the subject matter information of the assurance engagement is not financial

statements. For example, a self-review threat would be created if the firm developed and prepared

prospective financial information and subsequently provided assurance on this prospective financial

information. Consequently, the firm should evaluate the significance of any self-review threat created by

the provision of such services. If the self-review threat is other than clearly insignificant safeguards

should be considered and applied as necessary to reduce the threat to an acceptable level.




Financial Statement Audit Clients That are Not Listed Entities or Public Interest Entities

290.170 (1) Subject to express prohibitions imposed by any written law and regulatory requirements, the firm,

or a network firm, may provide a financial statement audit client that is not a listed entity or public

interest entity with accounting and bookkeeping services, including payroll services, of a routine or

mechanical nature, provided any self-review threat created is reduced to an acceptable level.

Examples of such services include:

(a) Recording transactions for which the audit client has determined or approved the appropriate

account classification;

(b) Posting coded transactions to the audit client‟s general ledger;

(c) Preparing financial statements based on information in the trial balance; and

(d) Posting the audit client approved entries to the trial balance.


(2) The significance of any threat created should be evaluated and, if the threat is other than clearly



(a) Making arrangements so such services are not performed by a member of the assurance

team;

(b) Implementing policies and procedures to prohibit the individual providing such services from

making any managerial decisions on behalf of the audit client;

(c) Requiring the source data for the accounting entries to be originated by the audit client;

(d) Requiring the underlying assumptions to be originated and approved by the audit client; or

(e) Obtaining audit client approval for any proposed journal entries or other changes affecting

the financial statements.




Financial Statement Audit Clients That are Listed Entities or Public Interest Entities

290.171 The provision of accounting and bookkeeping services, including payroll services and the preparation of

financial statements or financial information which forms the basis of the financial statements on which

the audit report is provided, on behalf of a financial statement audit client that is a listed entity or public

interest entity, may impair the independence of the firm or network firm, or at least give the appearance

of impairing independence. Accordingly, no safeguard other than the prohibition of such services, could

reduce the threat created to an acceptable level. Therefore, a firm or a network firm should not, provide

such services to a listed entity or public interest entity that is a financial statement audit client.





Valuation Services

290.174 A valuation comprises the making of assumptions with regard to future developments, the application of

certain methodologies and techniques, and the combination of both in order to compute a certain value,

or range of values, for an asset, a liability or for a business as a whole.

290.175 A self-review threat may be created when a firm or network firm performs a valuation for a financial

statement audit client that is to be incorporated into the client‟s financial statements.

290.176 If the valuation service involves the valuation of matters material to the financial statements and the

valuation involves a significant degree of subjectivity, the self-review threat created could not be reduced

to an acceptable level by the application of any safeguard. Accordingly, such valuation services should not

be provided or, alternatively, the only course of action would be to withdraw from the financial statement

audit engagement.

290.177 (1) Performing valuation services for a financial statement audit client that are neither separately, nor

in the aggregate, material to the financial statements, or that do not involve a significant degree of

subjectivity, may create a self-review threat that could be reduced to an acceptable level by the

application of safeguards. Such safeguards might include:

(a) Involving an additional professional accountant who was not a member of the assurance

team to review the work done or otherwise advise as necessary;


(b) Confirming with the audit client their understanding of the underlying assumptions of the

valuation and the methodology to be used and obtaining approval for their use;

(c) Obtaining the audit client‟s acknowledgement of responsibility for the results of the work

performed by the firm; and

(d) Making arrangements so that personnel providing such services do not participate in the audit

engagement.

(2) In determining whether the above safeguards would be effective, consideration should be given to

the following matters:

(a) The extent of the audit client‟s knowledge, experience and ability to evaluate the issues

concerned, and the extent of their involvement in determining and approving significant

matters of judgment.

(b) The degree to which established methodologies and professional guidelines are applied when

performing a particular valuation service.

(c) For valuations involving standard or established methodologies, the degree of subjectivity

inherent in the item concerned.

(d) The reliability and extent of the underlying data.

(e) The degree of dependence on future events of a nature which could create significant

volatility inherent in the amounts involved.

(f) The extent and clarity of the disclosures in the financial statements.

290.178 When a firm, or a network firm, performs a valuation service for a financial statement audit client for the

purposes of making a filing or return to a tax authority, computing an amount of tax due by the client, or

for the purpose of tax planning, this would not create a significant threat to independence because such

valuations are generally subject to external review, for example by a tax authority.

290.179 When the firm performs a valuation that forms part of the subject matter information of an assurance

engagement that is not a financial statement audit engagement, the firm should consider any self-review

threats. If the threat is other than clearly insignificant, safeguards should be considered and applied as

necessary to eliminate the threat or reduce it to an acceptable level.



Provision of Taxation Services to Financial Statement Audit Clients

290.180 Taxation services comprise a broad range of services, including compliance, planning, provision of formal

taxation opinions and assistance in the resolution of tax disputes. Such assignments are generally not

seen to create threats to independence.


Provision of Non-assurance Services to Assurance Clients Provision of Internal Audit Services to Financial Statement Audit Clients

290.181 A self-review threat may be created when a firm, or network firm, provides internal audit services to a

financial statement audit client. The range of activities encompassed by the term „internal audit services‟

is wide. Internal audit services may comprise an extension of the firm‟s audit service beyond

requirements of generally accepted auditing standards, assistance in the performance of a client‟s internal

audit activities in specific areas (for example, by providing specialized technical services or resources in

particular locations), or outsourcing of the activities, or providing occasional internal audit services on an

ad hoc basis. In evaluating any threats to independence, the nature of the service will need to be

considered. For this purpose, internal audit services do not include operational internal audit services


unrelated to the internal accounting controls, financial systems or financial statements.

290.182 Services involving an extension of the procedures required to conduct a financial statement audit in

accordance with Malaysian Approved Standards on Auditing would not be considered to impair

independence with respect to the audit client provided that the firm‟s or network firm‟s personnel do not

act or appear to act in a capacity equivalent to a member of audit client management. The threat to

independence would be unacceptably high where the firm or network firm provides internal audit services

that involve the firm‟s or network firm‟s personnel taking decisions or making judgments, which are

properly the responsibility of management in the normal course of their employment.

290.183 When the firm, or a network firm, provides assistance in the performance of a financial statement audit

client‟s internal audit activities or undertakes the outsourcing of some of the activities, any self-review

threat created may be reduced to an acceptable level by ensuring that there is a clear separation

between the management and control of the internal audit by client management and the internal audit

activities themselves.

290.184 Performing a significant portion of the financial statement audit client‟s internal audit activities may

create a self-review threat and a firm, or network firm, should consider the threats and proceed with

caution before taking on such activities. Appropriate safeguards should be put in place and the firm, or

network firm, should, in particular, ensure that the financial statement audit client acknowledges its

responsibilities for establishing, maintaining and monitoring the system of internal controls. The threat to

independence is unacceptably high where the firm or network firm cannot perform the financial statement

audit of the financial statement audit client without placing significant reliance on the work performed by

the firm or network firm for the purposes of the internal audit services engagement.

290.185 Safeguards that should be applied in all circumstances to reduce any threats created to an acceptable

level include ensuring that:

(a) The audit client is responsible for internal audit activities and acknowledges its responsibility for

establishing, maintaining and monitoring the system of internal controls;

(b) The audit client designates a competent employee, preferably within senior management, to be

responsible for internal audit activities;

(c) The audit client, the audit committee or supervisory body approves the scope, risk and frequency of

internal audit work;

(d) The audit client is responsible for evaluating and determining which recommendations of the firm

should be implemented;

(e) The audit client evaluates the adequacy of the internal audit procedures performed and the findings

resulting from the performance of those procedures by, among other things, obtaining and acting

on reports from the firm; and

(f) The findings and recommendations resulting from the internal audit activities are reported

appropriately to the audit committee or supervisory body.

290.186 Consideration should also be given to whether such non-assurance services should be provided only by

personnel not involved in the financial statement audit engagement and with different reporting lines

within the firm.

290.186A Where a financial statement audit client is a listed entity or public interest entity the firm or network firm

should not accept an engagement to provide internal audit services.


Provision of Non-assurance Services to Assurance Clients Provision of IT Systems Services to Financial Statement Audit Clients

290.187 The provision of services by a firm or network firm to a financial statement audit client that involve the

design and implementation of financial information technology systems that are used to generate

information forming part of a client‟s financial statements may create a self-review threat.

290.188 The self-review threat is likely to be too significant to allow the provision of such services to a financial

statement audit client unless appropriate safeguards are put in place ensuring that:


(a) The audit client acknowledges its responsibility for establishing and monitoring a system of internal

controls;

(b) The audit client designates a competent employee, preferably within senior management, with the

responsibility to make all management decisions with respect to the design and implementation of

the hardware or software system;

(c) The audit client makes all management decisions with respect to the design and implementation

process;

(d) The audit client evaluates the adequacy and results of the design and implementation of the

system; and

(e) The audit client is responsible for the operation of the system (hardware or software) and the data

used or generated by the system.

290.189 Consideration should also be given to whether such non-assurance services should be provided only by

personnel not involved in the financial statement audit engagement and with different reporting lines

within the firm.

290.190 The provision of services by a firm, or network firm, to a financial statement audit client which involve

either the design or the implementation of financial information technology systems that are used to

generate information forming part of a client‟s financial statements may also create a self-review threat.

The significance of the threat, if any, should be evaluated and, if the threat is other than clearly

insignificant, safeguards should be considered and applied as necessary to eliminate the threat or reduce

it to an acceptable level.

290.191 The provision of services in connection with the assessment, design and implementation of internal

accounting controls and risk management controls are not considered to create a threat to independence

provided that firm or network firm personnel do not perform management functions.

290.191A Where a financial statement audit client is a listed entity or public interest entity -

(1) The firm or network firm should not accept an engagement to design, provide or implement

financial information technology services where:

(a) the systems concerned would be important to any significant part of the accounting system or

to the production of the financial statements; or

(b) the engagement would lead to the firm‟s or network firm‟s personnel taking decisions or

making judgments which are properly the responsibility of management in the normal course

of their employment.

(2) Other than systems that are important to any significant part of the accounting system or to the

production of the financial statements, and provided that the management has the requisite

expertise, an engagement to design, provide or implement financial information technology

systems for a financial statement audit client may be accepted, provided that a knowledgeable

member of management or senior employee of the financial statement audit client with the

requisite expertise has been designated by the financial statement audit client as having

responsibility for overseeing the non-audit services and provided that appropriate safeguards are

applied.

(3) Formal acceptance by management of the systems designed and installed by the firm or network

firm is unlikely to be an effective safeguard when, in substance, the firm or network firm has been

retained by management as experts and the firm or network firm makes important decisions in

relation to the design or implementation of systems of internal control and financial reporting.

(4) Additional safeguards include ensuring that –

(a) the financial information technology projects undertaken by the firm or network firm are

performed by partners and staff who have no involvement in the financial statement audit

engagement;

(b) the financial statement audit is reviewed by an independent partner to ensure that the

financial information technology work performed has been properly and effectively assessed

in the context of the financial statement audit engagement.



Provision of Non-assurance Services to Assurance Clients Temporary Staff Assignments to Financial Statement Audit Clients

290.192 (1) The lending of staff by a firm, or network firm, to a financial statement audit client may create a

self-review threat when the individual is in a position to influence the preparation of a client‟s

accounts or financial statements. In practice, such assistance may be given (particularly in

emergency situations) but only on the understanding that the firm‟s or network firm‟s personnel will

not be involved in:

(a) Making management decisions;

(b) Approving or signing agreements or other similar documents; or

(c) Exercising discretionary authority to commit the client.

(2) Each situation should be carefully analyzed to identify whether any threats are created and whether

appropriate safeguards should be implemented. Safeguards that should be applied in all

circumstances to reduce any threats to an acceptable level include:

(a) The staff providing the assistance should not be given audit responsibility for any function or

activity that they performed or supervised during their temporary staff assignment; and

(b) The financial statement audit client should acknowledge its responsibility for directing and

supervising the activities of firm, or network firm, personnel.

(3) Where a financial statement audit client is a listed entity or public interest entity the lending of staff

by a firm or network firm is prohibited.



Provision of Litigation Support Services to Financial Statement Audit Clients

290.193 Litigation support services may include activities such as acting as an expert witness, calculating

estimated damages or other amounts that might become receivable or payable as the result of litigation

or other legal dispute, and assistance with document management and retrieval in relation to a dispute or

litigation.

290.194 (1) A self-review threat may be created when the litigation support services provided to a financial

statement audit client include the estimation of the possible outcome and thereby affects the

amounts or disclosures to be reflected in the financial statements. The significance of any threat

created will depend upon factors such as:

(a) The materiality of the amounts involved;

(b) The degree of subjectivity inherent in the matter concerned; and

(c) The nature of the engagement.

(2) The firm, or network firm, should evaluate the significance of any threat created and, if the threat

is other than clearly insignificant, safeguards should be considered and applied as necessary to

eliminate the threat or reduce it to an acceptable level. Such safeguards might include:

(a) Policies and procedures to prohibit individuals assisting the audit client from making

managerial decisions on behalf of the client;

(b) Using professionals who are not members of the assurance team to perform the service; or

(c) The involvement of others, such as independent experts.

290.195 If the role undertaken by the firm or network firm involved making managerial decisions on behalf of the

financial statement audit client, the threats created could not be reduced to an acceptable level by the

application of any safeguard. Therefore, the firm or network firm should not perform this type of service


for a financial statement audit client.


Provision of Non-assurance Services to Assurance Clients Provision of Dispute Resolution Services to Financial Statement Audit Clients





290.200 Acting for a financial statement audit client in the resolution of a dispute in such circumstances when the

amounts involved are material in relation to the financial statements of the audit client would create

advocacy and self-review threats so significant no safeguard could reduce the threat to an acceptable

level. Therefore, the firm should not perform this type of service for a financial statement audit client.

290.201 When a firm is asked to act in an advocacy role for a financial statement audit client in the resolution of a

dispute or litigation in circumstances when the amounts involved are not material to the financial

statements of the audit client, the firm should evaluate the significance of any advocacy and self-review

threats created and, if the threat is other than clearly insignificant, safeguards should be considered and

applied as necessary to eliminate the threat or reduce it to an acceptable level. Such safeguards might

include:

(a) Policies and procedures to prohibit individuals assisting the audit client from making managerial

decisions on behalf of the client; or

(b) Using professionals who are not members of the assurance team to perform the service.



Provision of Non-assurance Services to Assurance Clients Recruiting Senior Management

290.203 (1) The recruitment of senior management for an assurance client, such as those in a position to affect

the subject matter information of the assurance engagement, may create current or future self-

interest, familiarity and intimidation threats. The significance of the threat will depend upon factors

such as:

(a) The role of the person to be recruited; and

(b) The nature of the assistance sought.

(2) The firm could generally provide such services as reviewing the professional qualifications of a

number of applicants and provide advice on their suitability for the post. In addition, the firm could

generally produce a short-list of candidates for interview, provided it has been drawn up using

criteria specified by the assurance client.

(3) The significance of the threat created should be evaluated and, if the threat is other than clearly


acceptable level. In all cases, the firm should not make management decisions and the decision as

to whom to hire should be left to the client.




Corporate Finance and Similar Activities

290.204 The provision of corporate finance services, advice or assistance to an assurance client may create

advocacy and self-review threats. In the case of certain corporate finance services, the independence

threats created would be so significant no safeguards could be applied to reduce the threats to an

acceptable level. For example, promoting, dealing in, or underwriting of an assurance client‟s shares is

not compatible with providing assurance services. Moreover, committing the assurance client to the terms

of a transaction or consummating a transaction on behalf of the client would create a threat to

independence so significant no safeguard could reduce the threat to an acceptable level. In the case of a

financial statement audit client the provision of those corporate finance services referred to above by a

firm or a network firm would create a threat to independence so significant no safeguard could reduce the

threat to an acceptable level.

290.205 Other corporate finance services may create advocacy or self-review threats; however, safeguards may

be available to reduce these threats to an acceptable level. Examples of such services include assisting a

client in developing corporate strategies, assisting in identifying or introducing a client to possible sources

of capital that meet the client specifications or criteria, and providing structuring advice and assisting a

client in analyzing the accounting effects of proposed transactions. Safeguards that should be considered

include:

(a) Policies and procedures to prohibit individuals assisting the assurance client from making

managerial decisions on behalf of the client;

(b) Using professionals who are not members of the assurance team to provide the services; and

(c) Ensuring the firm does not commit the assurance client to the terms of any transaction or

consummate a transaction on behalf of the client.

Section 290 Independence Fees and Pricing

Fees–Relative Size

290.206 (1) When the total fees generated by an assurance client represent a large proportion of a firm‟s total

fees, the dependence on that client or client group and concern about the possibility of losing the

client may create a self-interest threat. The significance of the threat will depend upon factors such

as:

(a) The structure of the firm; and

(b) Whether the firm is well established or newly created.




(a) Discussing the extent and nature of fees charged with the audit committee, or others charged

with governance;

(b) Taking steps to reduce dependency on the client;

(c) External quality control reviews; and

(d) Consulting a third party, such as a professional regulatory body or another professional

accountant.

290.206A (1) In all cases involving listed entities or public interest entities, if the total fees (arising from

assurance and non-assurance services) generated by one assurance client or its related entities

exceed 15% of the firm‟s total fees in each year over two consecutive financial periods, financial

dependency exists, in which case, a self-interest threat to independence is created. In such event,

the only course of action is to refuse to perform or withdraw from the assurance engagement.

(2) The firm is required to submit, together with the annual return of the firm lodged with the Institute,

a declaration by the managing partner of the firm that the firm has not breached the threshold set


out in sub-paragraph (1) for that year, and provide documentation in support of this as may be

required by any enforcement unit established by the Council for this purpose.

290.207 A self-interest threat may also be created when the fees generated by the assurance client represent a

large proportion of the revenue of an individual partner. The significance of the threat should be

evaluated and, if the threat is other than clearly insignificant, safeguards should be considered and

applied as necessary to reduce the threat to an acceptable level. Such safeguards might include:

(a) Policies and procedures to monitor and implement quality control of assurance engagements; and

(b) Involving an additional professional accountant who was not a member of the assurance team to

review the work done or otherwise advise as necessary.


Fees and Pricing Fees–Overdue

290.208 (1) A self-interest threat may be created if fees due from an assurance client for professional services

remain unpaid for a long time, especially if a significant part is not paid before the issue of the

assurance report for the following year. Generally the payment of such fees should be required

before the report is issued. The following safeguards may be applicable:

(a) Discussing the level of outstanding fees with the audit committee, or others charged with

governance.

(b) Involving an additional professional accountant who did not take part in the assurance

engagement to provide advice or review the work performed.

(2) The firm should also consider whether it is appropriate for the firm to be re-appointed, taking into

account:

(a) The overdue fees might be regarded as being equivalent to a loan to the client; and

(b) The significance of the overdue fees.


Fees and Pricing

Pricing

290.209 When a firm obtains an assurance engagement at a significantly lower fee level than that charged by the

predecessor firm, or quoted by other firms, the self-interest threat created will not be reduced to an

acceptable level unless:

(a) The firm is able to demonstrate that appropriate time and qualified staff are assigned to the task;

and

(b) All applicable assurance standards, guidelines and quality control procedures are being complied

with.


Fees and Pricing

Contingent Fees

290.210 Contingent fees are fees calculated on a predetermined basis relating to the outcome or result of a

transaction or the result of the work performed. For the purposes of this section, fees are not regarded as

being contingent if a court or other public authority has established them.

290.211 A contingent fee charged by a firm in respect of an assurance engagement creates self-interest and

advocacy threats that cannot be reduced to an acceptable level by the application of any safeguard.


Accordingly, a firm should not enter into any fee arrangement for an assurance engagement under which

the amount of the fee is contingent on the result of the assurance work or on items that are the subject

matter information of the assurance engagement.

290.212 (1) A contingent fee charged by a firm in respect of a non-assurance service provided to an assurance

client may also create self-interest and advocacy threats. If the amount of the fee for a non-

assurance engagement was agreed to, or contemplated, during an assurance engagement and was

contingent on the result of that assurance engagement, the threats could not be reduced to an

acceptable level by the application of any safeguard. Accordingly, the only acceptable action is not

to accept such arrangements.

(2) For other types of contingent fee arrangements, the significance of the threats created will depend

on factors such as:

(a) The range of possible fee amounts;

(b) The degree of variability;

(c) The basis on which the fee is to be determined;

(d) Whether the outcome or result of the transaction is to be reviewed by an independent third

party; and

(e) The effect of the event or transaction on the assurance engagement.

(3) The significance of the threats should be evaluated and, if the threats are other than clearly

insignificant, safeguards should be considered and applied as necessary to reduce the threats to an


(a) Disclosing to the audit committee, or others charged with governance, the extent and nature

of fees charged;

(b) Review or determination of the final fee by an unrelated third party; or

(c) Quality and control policies and procedures.

Section 290 Independence Gifts and Hospitality

290.213 Accepting gifts or hospitality from an assurance client may create self-interest and familiarity threats.

When a firm or a member of the assurance team accepts gifts or hospitality, unless the value is clearly

insignificant, the threats to independence cannot be reduced to an acceptable level by the application of

any safeguard. Consequently, a firm or a member of the assurance team should not accept such gifts or

hospitality.


Actual or Threatened Litigation

290.214 (1) When litigation takes place, or appears likely, between the firm or a member of the assurance team

and the assurance client, a self-interest or intimidation threat may be created. The relationship

between client management and the members of the assurance team must be characterized by

complete candor and full disclosure regarding all aspects of a client‟s business operations. The firm

and the client‟s management may be placed in adversarial positions by litigation, affecting

management‟s willingness to make complete disclosures and the firm may face a self-interest

threat. The significance of the threat created will depend upon such factors as:

(a) The materiality of the litigation;

(b) The nature of the assurance engagement; and

(c) Whether the litigation relates to a prior assurance engagement.

(2) Once the significance of the threat has been evaluated the following safeguards should be applied,

if necessary, to reduce the threats to an acceptable level:


(a) Disclosing to the audit committee, or others charged with governance, the extent and nature

of the litigation;

(b) (b) If the litigation involves a member of the assurance team, removing that individual from

the assurance team; or

(c) Involving an additional professional accountant in the firm who was not a member of the

assurance team to review the work done or otherwise advise as necessary.

(3) If such safeguards do not reduce the threat to an appropriate level, the only appropriate action is to

withdraw from, or refuse to accept, the assurance engagement.

PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS


Introduction

300.1 Part C illustrates how the conceptual framework contained in Part A is to be applied by professional

accountants in business.

300.2 Investors, creditors, employers and other sectors of the business community, as well as governments and

the public at large, all may rely on the work of professional accountants in business. Professional

accountants in business may be solely or jointly responsible for the preparation and reporting of financial

and other information, which both their employing organizations and third parties may rely on. They may

also be responsible for providing effective financial management and competent advice on a variety of

business-related matters.

300.3 A professional accountant in business may be a salaried employee, a partner, director (whether executive

or non-executive), an owner manager, a volunteer or another working for one or more employing

organization. The legal form of the relationship with the employing organization, if any, has no bearing on

the ethical responsibilities incumbent on the professional accountant in business.

300.4 A professional accountant in business has a responsibility to further the legitimate aims of their

employing organization. Part C does not seek to hinder a professional accountant in business from

properly fulfilling that responsibility, but considers circumstances in which conflicts may be created with

the absolute duty to comply with the fundamental principles.

300.5 A professional accountant in business often holds a senior position within an organization. The more

senior the position, the greater will be the ability and opportunity to influence events, practices and

attitudes. A professional accountant in business is expected, therefore, to encourage an ethics-based

culture in an employing organization that emphasizes the importance that senior management places on

ethical behaviour.

300.6 The examples presented in the following sections are intended to illustrate how the conceptual framework

is to be applied and are not intended to be, nor should they be interpreted as, an exhaustive list of all

circumstances experienced by a professional accountant in business that may create threats to

compliance with the principles. Consequently, it is not sufficient for a professional accountant in business

merely to comply with the examples; rather, the framework should be applied to the particular

circumstances faced.


Threats and Safeguards

300.7 Compliance with the fundamental principles may potentially be threatened by a broad range of

circumstances. Many threats fall into the following categories:

(a) Self-interest;

(b) Self-review;

(c) Advocacy;


(d) Familiarity; and

(e) Intimidation.

These threats are discussed further in Part A.

300.8 Examples of circumstances that may create self-interest threats for a professional accountant in business

include, but are not limited to:

(a) Financial interests, loans or guarantees.

(b) Incentive compensation arrangements.

(c) Inappropriate personal use of corporate assets.

(d) Concern over employment security.

(e) Commercial pressure from outside the employing organization.

300.9 Circumstances that may create self-review threats include, but are not limited to, business decisions or

data being subject to review and justification by the same professional accountant in business responsible

for making those decisions or preparing that data.

300.10 When furthering the legitimate goals and objectives of their employing organizations professional

accountants in business may promote the organization‟s position, provided any statements made are

neither false nor misleading. Such actions generally would not create an advocacy threat.

300.11 Examples of circumstances that may create familiarity threats include, but are not limited to:

(a) A professional accountant in business in a position to influence financial or non-financial reporting

or business decisions having an immediate or close family member who is in a position to benefit

from that influence.

(b) Long association with business contacts influencing business decisions.

(c) Acceptance of a gift or preferential treatment, unless the value is clearly insignificant.

300.12 Examples of circumstances that may create intimidation threats include, but are not limited to:

(a) Threat of dismissal or replacement of the professional accountant in business or a close or

immediate family member over a disagreement about the application of an accounting principle or

the way in which financial information is to be reported.

(b) A dominant personality attempting to influence the decision making process, for example with

regard to the awarding of contracts or the application of an accounting principle.

300.13 Professional accountants in business may also find that specific circumstances give rise to unique threats

to compliance with one or more of the fundamental principles. Such unique threats obviously cannot be

categorized. In all professional and business relationships, professional accountants in business should

always be on the alert for such circumstances and threats.

300.14 Safeguards that may eliminate or reduce to an acceptable level the threats faced by professional

accountants in business fall into two broad categories:

(a) Safeguards created by the profession, legislation or regulation; and


300.15 Examples of safeguards created by the profession, legislation or regulation are detailed in Part A.

300.16 Safeguards in the work environment include, but are not restricted to:

(a) The employing organization‟s systems of corporate oversight or other oversight structures.

(b) The employing organization‟s ethics and conduct programs.

(c) Recruitment procedures in the employing organization emphasizing the importance of employing

high caliber competent staff.

(d) Strong internal controls.

(e) Appropriate disciplinary processes.

(f) Leadership that stresses the importance of ethical behaviour and the expectation that employees

will act in an ethical manner.

(g) Policies and procedures to implement and monitor the quality of employee performance.


(h) Timely communication of the employing organization‟s policies and procedures, including any

changes to them, to all employees and appropriate training and education on such policies and

procedures.

(i) Policies and procedures to empower and encourage employees to communicate to senior levels

within the employing organization any ethical issues that concern them without fear of retribution.

(j) Consultation with another appropriate professional accountant.

300.17 In circumstances where a professional accountant in business believes that unethical behaviour or actions

by others will continue to occur within the employing organization, the professional accountant in

business should consider seeking legal advice. In those extreme situations where all available safeguards

have been exhausted and it is not possible to reduce the threat to an acceptable level, a professional

accountant in business may conclude that it is appropriate to resign from the employing organization.

Section 310 Preparation and Reporting of Information

Preparation and Reporting of Information

320.1 Professional accountants in business are often involved in the preparation and reporting of information

that may either be made public or used by others inside or outside the employing organization. Such

information may include financial or management information, for example, forecasts and budgets,

financial statements, management discussion and analysis, and the management letter of representation

provided to the auditors as part of an audit of financial statements. A professional accountant in business

should prepare or present such information fairly, honestly and in accordance with relevant professional

standards so that the information will be understood in its context.

320.2 A professional accountant in business who has responsibility for the preparation or approval of the

general purpose financial statements of an employing organization should ensure that those financial

statements are presented in accordance with the applicable financial reporting standards.

320.3 A professional accountant in business should maintain information for which the professional accountant

in business is responsible in a manner that:

(a) Describes clearly the true nature of business transactions, assets or liabilities;

(b) Classifies and records information in a timely and proper manner; and

(c) Represents the facts accurately and completely in all material respects.

320.4 Threats to compliance with the fundamental principles, for example self-interest or intimidation threats to

objectivity or professional competence and due care, may be created where a professional accountant in

business may be pressured (either externally or by the possibility of personal gain) to become associated

with misleading information or to become associated with misleading information through the actions of

others.

320.5 The significance of such threats will depend on factors such as the source of the pressure and the degree

to which the information is, or may be, misleading. The significance of the threats should be evaluated

and, if they are other than clearly insignificant, safeguards should be considered and applied as necessary

to eliminate them or reduce them to an acceptable level. Such safeguards may include consultation with

superiors within the employing organization, for example, the audit committee or other body responsible

for governance or to seek guidance from the Institute.

320.6 Where it is not possible to reduce the threat to an acceptable level, a professional accountant in business

should refuse to remain associated with information they consider is or may be misleading. Should the

professional accountant in business be aware that the issuance of misleading information is either

significant or persistent, the professional accountant in business should consider informing appropriate

authorities in line with the guidance in Section 140. The professional accountant in business may also

wish to seek legal advice or resign.


Section 310 Acting with Sufficient Expertise

Acting with Sufficient Expertise

330.1 The fundamental principle of professional competence and due care requires that a professional

accountant in business should only undertake significant tasks for which the professional accountant in

business has, or can obtain, sufficient specific training or experience. A professional accountant in

business should not intentionally mislead an employer as to the level of expertise or experience

possessed, nor should a professional accountant in business fail to seek appropriate expert advice and

assistance when required.

330.2 Circumstances that threaten the ability of a professional accountant in business to perform duties with

the appropriate degree of professional competence and due care include:

(a) Insufficient time for properly performing or completing the relevant duties.

(b) Incomplete, restricted or otherwise inadequate information for performing the duties properly.

(c) Insufficient experience, training and/or education.

(d) Inadequate resources for the proper performance of the duties.

330.3 The significance of such threats will depend on factors such as the extent to which the professional

accountant in business is working with others, relative seniority in the business and the level of

supervision and review applied to the work. The significance of the threats should be evaluated and, if

they are other than clearly insignificant, safeguards should be considered and applied as necessary to

eliminate them or reduce them to an acceptable level. Safeguards that may be considered include:

(a) Obtaining additional advice or training.

(b) Ensuring that there is adequate time available for performing the relevant duties.

(c) Obtaining assistance from someone with the necessary expertise.

(d) Consulting, where appropriate, with:

- Superiors within the employing organization;

- Independent experts; or

(e) To seek guidance from the Institute.

330.4 Where threats cannot be eliminated or reduced to an acceptable level, professional accountants in

business should consider whether to refuse to perform the duties in question. If the professional

accountant in business determines that refusal is appropriate the reasons for doing so should be clearly

communicated.

Section 340 Financial Interests

Financial Interests

340.1 Professional accountants in business may have financial interests, or may know of financial interests of

immediate or close family members, that could, in certain circumstances, give rise to threats to

compliance with the fundamental principles. For example, self-interest threats to objectivity or

confidentiality may be created through the existence of the motive and opportunity to manipulate price

sensitive information in order to gain financially. Examples of circumstances that may create self-interest

threats include, but are not limited to situations where the professional accountant in business or an

immediate or close family member:

(a) Holds a direct or indirect financial interest in the employing organization and the value of that

financial interest could be directly affected by decisions made by the professional accountant in

business;

(b) Is eligible for a profit related bonus and the value of that bonus could be directly affected by

decisions made by the professional accountant in business;

(c) Holds, directly or indirectly, share options in the employing organization, the value of which could

be directly affected by decisions made by the professional accountant in business;


(d) Holds, directly or indirectly, share options in the employing organization which are, or will soon be,

eligible for conversion; or

(e) May qualify for share options in the employing organization or performance related bonuses if

certain targets are achieved.

340.2 In evaluating the significance of such a threat, and the appropriate safeguards to be applied to eliminate

the threat or reduce it to an acceptable level, professional accountants in business must examine the

nature of the financial interest. This includes an evaluation of the significance of the financial interest and

whether it is direct or indirect. Clearly, what constitutes a significant or valuable stake in an organization

will vary from individual to individual, depending on personal circumstances.

340.3 If threats are other than clearly insignificant, safeguards should be considered and applied as necessary

to eliminate or reduce them to an acceptable level. Such safeguards may include:

(a) Policies and procedures for a committee independent of management to determine the level of form

of remuneration of senior management.

(b) Disclosure of all relevant interests and of any plans to trade in relevant shares to those charged

with the governance of the employing organization, in accordance with any internal policies.

(c) Consultation, where appropriate, with superiors within the employing organization.

(d) Consultation, where appropriate, with those charged with the governance of the employing

organization or relevant professional bodies.

(e) Internal and external audit procedures.

(f) Up-to-date education on ethical issues and the legal restrictions and other regulations around

potential insider trading.

340.4 A professional accountant in business should neither manipulate information nor use confidential

information for personal gain.

Section 340 Inducements

Receiving Offers

350.1 A professional accountant in business or an immediate or close family member may be offered an

inducement. Inducements may take various forms, including gifts, hospitality, preferential treatment and

inappropriate appeals to friendship or loyalty.

350.2 Offers of inducements may create threats to compliance with the fundamental principles. When a

professional accountant in business or an immediate or close family member is offered an inducement,

the situation should be carefully considered. Self- interest threats to objectivity or confidentiality are

created where an inducement is made in an attempt to unduly influence actions or decisions, encourage

illegal or dishonest behaviour or obtain confidential information. Intimidation threats to objectivity or

confidentiality are created if such an inducement is accepted and it is followed by threats to make that

offer public and damage the reputation of either the professional accountant in business or an immediate

or close family member.

350.3 The significance of such threats will depend on the nature, value and intent behind the offer. If a

reasonable and informed third party, having knowledge of all relevant information, would consider the

inducement insignificant and not intended to encourage unethical behaviour, then a professional

accountant in business may conclude that the offer is made in the normal course business and may

generally conclude that there is no significant threat to compliance with the fundamental principles.

350.4 If evaluated threats are other than clearly insignificant, safeguards should be considered and applied as

necessary to eliminate them or reduce them to an acceptable level. When the threats cannot be

eliminated or reduced to an acceptable level through the application of safeguards, a professional

accountant in business should not accept the inducement. As the real or apparent threats to compliance

with the fundamental principles do not merely arise from acceptance of an inducement but, sometimes,

merely from the fact of the offer having been made, additional safeguards should be adopted. A

professional accountant in business should assess the risk associated with all such offers and consider

whether the following actions should be taken:


(a) Where such offers have been made, immediately inform higher levels of management or those

charged with governance of the employing organization;

(b) Inform third parties of the offer – for example, a professional body or the employer of the individual

who made the offer; a professional accountant in business should, however, consider seeking legal

advice before taking such a step;

(c) Advise immediate or close family members of relevant threats and safeguards where they are

potentially in positions that might result in offers of inducements, for example as a result of their

employment situation; and

(d) Inform higher levels of management or those charged with governance of the employing

organization where immediate or close family members are employed by competitors or potential

suppliers of that organization.

Section 340 Inducements

Receiving Offers

350.5 A professional accountant in business may be in a situation where the professional accountant in business

is expected to, or is under other pressure to, offer inducements to subordinate the judgment of another

individual or organization, influence a decision-making process or obtain confidential information.

350.6 Such pressure may come from within the employing organization, for example, from a colleague or

superior. It may also come from an external individual or organization suggesting actions or business

decisions that would be advantageous to the employing organization possibly influencing the professional

accountant in business improperly.

350.7 A professional accountant in business should not offer an inducement to improperly influence professional

judgment of a third party.

350.8 Where the pressure to offer an unethical inducement comes from within the employing organization, the

professional accountant should follow the principles and guidance regarding ethical conflict resolution set

out in Part A.


4. PART II: BY-LAWS ON PROFESSIONAL CONDUCT AND PRACTICE

PART II: EXPLANATORY FOREWORD

1. Part II of the By-Laws of the Institute consists of the By-Laws on Professional Conduct and Practice. The By-Laws on Professional Conduct and Practice sets out the obligations applicable to all members as professional accountants

or to member firms in respect of their professional conduct or the practice of their firms.

2. Part II of the By-Laws has been framed with the objective that members exhibit the highest standards of

professionalism and professional conduct that are expected of the profession, when dealing with the Institute,

employers or clients, regulators and other stakeholders, as well as with each other.

3. A breach of these By-Laws will prima facie give rise to a complaint of unprofessional conduct against the member

concerned. As such, members who fail to observe proper standards of professional conduct as set out in these by-laws may be required to answer a complaint before the Investigation and the Disciplinary Committees of the

Institute pursuant to the Malaysian Institute of Accountants (Disciplinary) (Note: 2) Rules 2002 [P.U.(A)

229/2002].

4. The By-Laws on Professional Conduct and Practice consists of two parts. Part A sets out the professional conduct

obligations of all professional accountants as members of the Institute. Part B sets out the professional conduct or practice obligations of members in public practice or member firms, as may be the case.

NOTE: Part II of the By-Laws incorporates some of the Institute’s existing By-Laws (On Professional Ethics and Conduct)

that have not been subsumed in Part I.

PART A: ALL PROFESSIONAL ACCOUNTANTS

Section 400 Induction Course upon Admission

Induction Course

400.1 (1) All professional accountants once admitted as members of the Institute, are required to attend an Induction Course organized by the Institute, within six (6) months of admission.

400.2 The Council may in its absolute discretion, grant a postponement from the requirement of this section for

the following reasons:-

(a) prolonged illness or disability; or

(b) overseas for an indefinite period of time; or

(c) any other reason as may be found reasonable by the Council.

400.3 An application made pursuant to paragraph 400.2 should be in writing and supported by a certificate from

a licensed physician or hospital in the case of subparagraph (a), or supported by any other relevant documents in respect of subparagraphs (b) and (c), wherever appropriate. Such application should be

made as soon as practicable and in any event, before the expiry of six (6) months from the date of

admission.

400.4 The decision of the Council on an application made pursuant to paragraph 400.2 is final.

400.5 In exercising its discretion pursuant to paragraph 400.2, the Council may require the professional accountant to submit a letter of undertaking stating that the professional accountant will attend the

Induction Course upon recovery from the illness or upon returning to the country or upon the lapse of the

reason for which the Council has granted the exemption.

Section 410 : Continuing Professional Education

Continuing Professional Education

410.1 There are rapid changes to the knowledge and competencies that are required of professional

accountants in order for them to discharge their professional obligations effectively and responsibly. Rapid developments by way of changes to legislation, accounting standards and guidelines, developments

in technology, increased public expectations of the services of professional accountants, place increasing

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demands on the profession. Professional accountants face unprecedented scrutiny about the quality of

internal control, governance, financial statements and independent audits. These pressures apply to professional accountants in both the private and public sectors. Professional accountants in all sectors

have important contributions to make. Continued development of professional competence and lifelong learning are critical to meet these expectations. It is every professional accountant‟s responsibility to

ensure that the quality of professional service rendered is of high standard.

410.2 In order to maintain professional competence and to ensure the exercise of due care at all times, a professional accountant is required to fulfill the requirements of and participate in CPE learning activities

that are relevant to his or her current and future work and professional responsibilities. CPE requirements

are applicable to all professional accountants regardless of sector or size of business in which they operate, because:

(a) All professional accountants have an ethical obligation of due care to their clients, employers and relevant stakeholders and need to demonstrate their ability to discharge this responsibility in a

competent manner.

(b) Professional accountants in all sectors hold positions of importance involving among others, financial reporting, public accountability and maintaining the public trust.

(c) The public is likely to rely on the designation or professional standing of the professional accountant. Moreover, all professional accountants carry the professional designation and any lack

of competence or ethical behaviour has the same consequences to the reputation and standing of

the profession, irrespective of the sector or role in which they operate.

(d) All sectors are affected by the rapidly changing environment and the consequential need to adapt

the strategic or business plans of those organizations relying on the professional accountant‟s professional competence.

(e) Employers hiring professional accountants in any sector rely, at least to some extent, on the

professional designation as proof of professional competence.

410.3 CPE learning activities are those learning activities that develop and maintain capabilities to enable

professional accountants to perform competently within their professional environments. Participation in

CPE learning activities is therefore vital in maintaining high standards and public confidence in the profession.

410.4 All professional accountants are required to complete at least 120 CPE credit hours of relevant CPE learning for every rolling 3 calendar year period, of which 60 CPE credit hours should be structured and

verifiable, and at least twenty (20) CPE credit hours of such structured and verifiable CPE learning should

be obtained each calendar year. Accredited structured and unstructured CPE learning activities are shown in Appendix V to the By-Laws.

The application of these requirements to professional accountants who have been admitted as members at different periods is set out in Appendix VI to the By-Laws.

410.5 Any failure to maintain and improve professional competence is a violation of one of the fundamental

principles of the profession and can result in disciplinary action. It is unfair to the majority of professional accountants who comply with the CPE requirements to allow those who do not comply to claim the same

status or competencies.

NOTE: The above provisions are based substantially on the provisions in the International Education Standard (IES) 7 issued

by IFAC.

410.6

A CPE audit will be conducted by the Institute on a sample of professional accountants who will be selected at random from the Institute‟s records. During each CPE audit, the randomly selected professional accountants will be required to

produce evidence of their compliance with the CPE requirements set out in section 130 of Part I of the By-Laws.

410.7

Professional accountants are required to maintain records of their compliance with the CPE requirements set out in

section 410 above.

410.8

Professional accountants are required to tender the appropriate evidence of such compliance if called upon to do so

pursuant to paragraph 410.6.


410.9 The Council may in its absolute discretion, grant a temporary or partial exemption from the CPE requirements

for the following reasons - (a) prolonged illness or disability; and/or

(b) any other reason as may be determined by the Council. 410.10

An application made pursuant to paragraph 410.9 should be in writing and supported by a certificate from a licensed

physician or hospital in the case of subparagraph (a), or supported by any other relevant documents in respect of

subparagraphs (b), wherever appropriate. Such application should be made no later than 30 days after the professional accountant is selected for the CPE audit.

410.11 The decision of the Council on an application made pursuant to paragraph 410.9 is final. 410.12

In exercising its discretion pursuant to paragraph 410.9, the Council may require the professional accountant to submit a letter of undertaking stating that the professional accountant will fulfill the CPE requirements pursuant to

section 410 above upon recovery from the illness or upon the lapse of the reason for which the Council has granted the exemption.

410.13

Members of the Institute who are mentors in the CARE programme for duration of one (1) year will be entitle to 4 CPE structured hours regardless of the number of the mentee that he has. To qualify as a mentor, one must have been

mentoring a CARE participant (mentee) for a minimum of three (3) months. If he had been mentoring less than one (1) year, the CPE hours will be prorated accordingly.

With effect from 1 November 2009

Section 420 Description and Designatory Letters

Description and Designatory Letters

420.1 Every professional accountant in describing himself or herself as an accountant in Malaysia shall use the

designations “Chartered Accountant”, "Licensed Accountant" or “Associate Member” with the designatory letters “C.A.(M)”, “L.A.(M)” or “A.M.(M)” respectively.

420.2 A professional accountant may use in conjunction with the abovementioned designations or the

abovementioned designatory letters any letters or words or a combination of letters and words to indicate-

(a) membership of other professional bodies including the recognised bodies which are specified in Part II of the First Schedule to the Act;

(b) possession of academic degrees or diplomas of institutions of higher learning or any academic post-

graduate qualification from institutions of higher learning; or

(c) possession of civil or military honours or decorations.

420.3 A member in public practice shall describe his or her firm as a firm of “Chartered Accountants” or as a firm of "Licensed Accountants" as appropriate.

420.4 Every member in public practice who signs any reports or other documents in a professional capacity

either as an individual or for and on behalf of the firm shall only use the designations “Chartered Accountant” or “Chartered Accountants” or "Licensed Accountant" or "Licensed Accountants" to describe

that member in public practice or the firm in the report or documents.

Section 430 Public Practice Programme

Public Practice Programme

430.1 (1) All professional accountants applying for a practising certificate for the first time, pursuant to Rule 9

of the Malaysian Institute of Accountants (Membership and Council) Rules 2001 are required to

attend and complete the Institute‟s Public Practice Programme, prior to his/her application.

(2) The Membership Affairs Committee of the Council or any Committee so delegated by the Council for

this purpose, may reject the application of any professional accountant for a practising certificate if there is non-compliance with the above requirement without valid reason. Any professional


accountant aggrieved with such a decision, may appeal to the Council whose decision on the same

is final.

Section 420 Attention to Correspondence and Enquiries

Attention to Correspondence and Enquiries

440.1 Each professional accountant must reply to professional correspondence and enquiries expeditiously.

PART B: MEMBERS IN PUBLIC PRACTICE

Section 500 Method of Practice

Method of Practice

500.1 A member in public practice should not use a trade or association name or any other impersonal or

fictitious names under which to practise the profession. The term "trade or association name" means a business name that is not a personal name or a composite of personal names.

500.2 A member in public practice is not allowed to practise as a chartered accountant or licensed accountant

other than -

(a) in his or her own name, or

(b) in the name or names of his or her partner or partners, being chartered accountants or licensed accountants; or

(c) in the name of a firm existing at the time of the coming into operation of the Act or formed

thereafter provided that the partners in Malaysia are eligible to be registered as chartered accountants or licensed accountants.

500.3 (1) A member in public practice should not allow the name of the firm to be used by any organisation to conduct business that is incompatible to public practice or which would bring the profession to

disrepute.

(2) A member in public practice should not report or express an opinion on financial statements examined for the purposes of such report or opinion by a person other than a staff or member of

his or her firm, unless such other person is also a member in public practice, except for entities

which are incorporated or operating outside Malaysia.

(3) A member in public practice should not assist by any means and in any manner whatsoever any

person who practises or holds himself or herself out as a chartered accountant, auditor, tax consultant, tax adviser or any other like description in contravention of the Act or any other law for

the time being in force in Malaysia.

500.4 Subject to paragraph 500.6, a member in public practice should not allow any person who is not a member of the Institute to practise in partnership with him or her as a chartered accountant/licensed

accountant or to practise in his or her name as a chartered accountant/licensed accountant.

500.5 (1) A member who is not entitled to be a member in public practice is not allowed to -

(a) hold himself or herself out to be a member in public practice in any manner whatsoever;

(b) provide public practice services as a chartered accountant, auditor, tax consultant or tax adviser or any services of a similar nature that may indicate or be likely to lead persons to

infer that he or she is a member in public practice or qualified by any written law to practise the profession of or is in practice as a chartered accountant.

(2) Notwithstanding paragraph 500.5(1), the aforesaid member may carry on the work of a tax

consultant or a tax adviser if authorised to do so under section 153 of the Income Tax Act 1967.

(3) A member who is registered with the Institute as a licensed accountant is not precluded by

paragraph 500.5(1) from carrying on any practice in which he or she was professionally engaged

immediately before the coming into operation of the Act.

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500.6 (1) A member may subject to these by-laws, participate whether as a director and/or shareholder in a

limited or unlimited company which offers taxation, tax advice and taxation consultancy services, provided that in doing so -

(a) the member and/or the company does not contravene any written law; and

(b) the company is not in any way described as Chartered Accountants or Licensed Accountants.

(2) Where members participate as directors and/or shareholders in limited or unlimited companies in

the manner as stated in paragraph 500.6(1), such members are - (a) deemed for the purposes of these by-laws to be members in public practice and the provisions

of the rules of the Institute and these by-laws with the appropriate modifications, apply to such

members; and (b) cause the companies to comply with these by-laws if such members hold the majority interest

and/or voting rights whether directly or indirectly in the companies.

500.7 Every professional accountant prior to commencement of public practice should apply to the Institute for

approval of the proposed name of the intended firm or practice.

500.8 (1) Where an application is made pursuant to paragraph 500.7, the Membership Affairs Committee of the Council or any other Committee so delegated by the Council for this purpose must be satisfied

that the proposed name of the intended practice does not duplicate the name of an existing member firm and is not a name which in the opinion of the Council is undesirable, before approval

is granted.

(2) Any professional accountant aggrieved with such a decision, may appeal to the Council whose decision on the same is final.

500.9 (1) Every member in public practice is required to -

(a) register his firm with the Institute by informing the Institute in writing of the name and

address of his or her firm and the addresses of any branches and any other relevant

particulars requested by the Institute;

(b) inform the Institute of any changes in respect of the particulars referred to in sub-paragraph

(a) within one (1) month thereafter;

(c) if the firm is associated with any other firm of accountants, register such association whether local or overseas with the Institute and this must be supported by evidence; and

(d) upon registration of his firm with the Institute, lodge an annual return with the Institute by 31 January of each calendar year despite the fact that there may be no changes in particulars

to the firm.

(2) Where the member is practising in a partnership, only one partner of the firm is required to lodge the annual return on behalf of the firm.

500.10 Upon registration of the firm pursuant to paragraph 500.9, the Institute will issue the firm a certificate of registration which -

(a) states the firm‟s registration number and that the firm is a member firm of the Institute;

(b) is required to be displayed at the premises of the member‟s firm; and

(c) has to be surrendered by the member in public practice to the Institute upon the dissolution of the

firm or change of name of the firm.

500.11 A member in public practice whose firm has been duly issued a certificate of registration pursuant to paragraph 500.11 and who is in compliance with these by-laws, may insert the logo of the Institute on

the top of the letterhead of the firm whereby -

(a) the words “A Firm Registered with the Malaysian Institute of Accountants” is to be inserted under

the logo;

(b) the logo can be either in full colour or in black and white and should be used in accordance with the guidelines issued by the Council from time to time on the use of the logo.

500.12 (1) Every member in public practice is required to state his/her firm's number immediately after or below the firm's name, in official letters, accounts, invoices, official notices, publications, bills of


exchange, cheque, receipts, requisition forms and other like documents issued by the firm.

(2) The firm number means, in the case of firms providing audit services, the number allocated by the Companies Commission of Malaysia when the firm was first registered with the Registrar, or in the

case of firms providing public practice services other than audit services, the number allocated by the Institute.

500.13 A member in public practice should not allow the member firm including any branches of the member

firm to be under the management and control of a person who is not a member of the Institute. It is the duty and responsibility of a member in public practice to ensure that any branch of his or her firm is

under the management and control of a member of the Institute.

Section 510 Professional Indemnity Insurance

510.1 Every member in public practice is required to ensure that his or her firm carries and maintains a policy

of professional indemnity insurance.

510.2 Members in public practice are required to purchase policies from licensed insurance companies.

510.3 (1) Every member in public practice must maintain a policy of professional indemnity insurance with a

minimum coverage of Ringgit Malaysia One Hundred Thousand (RM100,000.00), upon commencement of public practice.

(2) Proof of such coverage is required for the purpose of the annual renewal of the member‟s practising certificate pursuant to Rule 9 of the Malaysian Institute of Accountants (Membership and Council)

Rules 2001.

(3) The Membership Affairs Committee of the Council or any other Committee so delegated by the Council for this purpose, may reject the application of any professional accountant for the renewal

of the practising certificate if there is non-compliance with the requirements of Rule 9 of the Malaysian Institute of Accountants (Membership and Council) Rules 2001 or with the above

requirement without proper excuse. Any professional accountant aggrieved with such a decision,

may appeal to the Council whose decision on the same is final.

510.4 Where a member in public practice carries on practice under more than one firm, that member is required to have separate policies of

professional indemnity insurance with a minimum coverage of Ringgit Malaysia One Hundred Thousand (RM100,000.00) each, for

himself or herself in each of these firms.

510.5 Where members choose to practice as a compound firm (herein defined as a mixture of firms as well as

body corporate recognised by the Institute as practising under a group), one of the member within the

compound firm can be nominated to arrange for the insurance need of the compound firm under one single policy. Any Committee so designated by the Council must be satisfied that the compound firm has

shown that together, they comply with Section 510.4 above

510.6 All members with practising certificates should satisfy themselves that they or their firm (including the

compound firm) have suitable arrangements in place to comply with the By-Laws on the professional

indemnity insurance of the Institute at all times.

Inserted 31 July 2008; With immediate effect.

Section 520 Death or Incapacity of a Sole Practitioner

520.1 Unless appropriate arrangements have been made, the continuing incapacity or death of a

sole practitioner will cause considerable difficulty and inconvenience to clients.

Furthermore, the resultant interruption of services will diminish the value of the practice and may even lead to its disintegration.

520.2 It is therefore important for a sole practitioner, to protect both his or her own interests as

well as the interests of the clients, to enter into such arrangements with another member or member firm as will enable the practice to be carried on with a minimum of dislocation

in the event of incapacity or death.

520.3 Such arrangements should be made within two (2) years from the date the sole

proprietorship was set up and should provide, so far as possible, for the practice to be

continued as a going concern until such time as the sole practitioner recovers or the representatives of his or her estate decide to dispose of the practice.


520.4 (1) A member in public practice who is a sole practitioner is required to enter into an

arrangement to enable the practice to continue with minimum disruption in the event of death or incapacity, in either of the following ways:

(a) by entering into an agreement with another sole practitioner or with a member firm; or

(b) by satisfying the Council that other adequate provision has been made.

(2) Members in public practice shall ensure that their executors and family are aware, in the event of death or incapacity, of the arrangements made for the management of

the practice.

520.5 (1) An arrangement, reciprocal or otherwise, between two sole practitioners may be appropriate. Alternatively, in many cases it will be advantageous for a sole

practitioner to enter into an arrangement with a member firm.

(2) Although such an arrangement may take the form of an agreement to manage, an

arrangement for the sale of the practice on a predetermination basis may in many

cases be more satisfactory.

(3) When such arrangements are under consideration, the compatibility of the respective

practices, especially in relation to audit procedures, fees and the general state of the work in both offices,

Section 530 Client Documents and Exercise of Lien

Release of Client Documents or Information

530.1 (1) Where there is a change in professional appointment, the existing professional accountant providing the relevant professional services should transfer all books, documents and papers of the client

which are or may have come into the professional accountant‟s possession, to the new professional

accountant appointed to provide such professional services, promptly after the change in appointment has been effected. The client should be advised accordingly.

(2) Where the new professional accountant requires information as to the client's affairs from the

existing professional accountant, lack of which might prejudice the client's interest, such information should be given promptly. No charge should be imposed for the provision of such

information, unless there is good reason to the contrary such as an unusual amount of work involved to provide the same.

Exercise of Lien

530.2 Notwithstanding paragraph 530.1, where a legal right of lien exists, the member in public practice may exercise that lien in appropriate circumstances.

530.3 A right of lien only exists where all four of the following circumstances apply:

(a) the documents retained must be the property of the client who owes the money and not of a third

party, no matter how closely connected with the client;

(b) the documents must have come into possession of the member by proper means;

(c) work must have been done by the member upon the documents; and

(d) the fees for which the lien is exercised must be outstanding in respect of such work and not in

respect of other unrelated work.

530.4 Accordingly, where a member in public practice does work for a company and also for the directors of

that company in their private capacities, if the fees for work done for a director in his or her private capacity are unpaid, no right of lien exists over the company's documents in the light of paragraphs

530.3(a) and (d) above.

530.5 In all events, members in public practice should consult their solicitors before seeking to exercise a lien in any but the most straightforward of cases. Similarly a client disputing the right of lien of a member might

be persuaded to consult that client‟s own solicitors. Where the member's right of lien is well founded the advice the client receives may change the client‟s attitude both to the lien and the unpaid fees.


Section 540 Referrals

Referrals

540.1 Where a member in public practice receives an assignment by referral from another member in public

practice, that member in public practice should not provide any other professional services to the referring member's client without informing the referring member.

540.2 At all times, a member in public practice who accepts a referral from another member in public practice

should not do anything that will impair the position of that member in the continuing work for the client.

Section 550 Quality Assurance and Practice Review

Quality Assurance

550.1 Every member in public practice is required to ensure that his or her firm complies with all relevant

professional standards for the purposes of assurance as to the quality of the public practice services provided by the firm whether through that member, his or her partner(s) and/or employees. In doing so,

every member in public practice has to ensure that the firm adopts and applies policies and procedures designed to maintain adherence to professional standards.

550.2 The professional standards required to be maintained, observed and applied by a member in public

practice to the extent applicable to the type of public practice services provided by that member or the firm, include:

(a) all standards and statements of professional conduct and ethics in the form of the Institute‟s By-

Laws in issue from time to time;

(b) all approved standards whether issued by the Council or otherwise, and all guidelines, statements

and/or circulars of best practices issued or prescribed by the Council and/or the Institute from time to time.

Practice Review

550.3 The Institute has established its Practice Review programme pursuant to the Council‟s Statement on Practice Review issued on 15 November 2002 together with its supporting appendices which are set out in

Appendix VII to these by-laws. Appendix VII forms part of this section.

550.4 The objectives of the Practice Review programme are-

(a) to ensure that all members in public practice maintain, observe and apply the relevant professional

standards, so as to assure that those members in public practice, their firms and their employees

are competent, ethical, and exercise due professional care in their professional work;

(b) to assist members in public practice to improve their professional standards where necessary; and

(c) to identify areas where members in public practice may require assistance in maintaining and observing professional standards.

550.5 The Practice Review programme does not set new professional standards. Rather, the professional

standards that the members in public practice and/or their firms are expected to maintain are those already prescribed by the Institute and which are summarised for convenience in paragraph 550.2 above.

550.6 All members in public practice and/or member firms are required to submit to and undergo the Institute‟s

Practice Review programme as established pursuant to the Council‟s Statement on Practice Review in Appendix VII to these by-laws.

550.7 The Practice Review programme is conducted by the Institute through its Practice Review Committee in accordance with the Council‟s Statement on Practice Review in Appendix VII to these by-laws, any other

directions issued by the Council from time to time and in accordance with any other procedures and

processes as may be determined by the Practice Review Committee.

550.8 Each member in public practice and/or the member‟s firm should comply with the requirements contained

in the Council‟s Statement on Practice Review in Appendix VII to these by-laws, any other directions issued by Council from time to time and with any other procedures or requirements imposed by the

Practice Review Committee for the purposes of carrying out the practice review pertaining to that

member‟s firm.

550.9 The Practice Review programme will be conducted over a cycle of not more than five (5) years or such


other period as determined by the Council in respect of member firms which are selected at random from

the Institute‟s records.

550.10 This section, unless otherwise determined by the Council, only operates in respect of members in public

practice and/or member firms who provide among others, audit services.

Practice Review Fees

550.11 (1) Each member in public practice and/or the member‟s firm is required to settle in full, the fees if

any, in respect of the practice review conducted pertaining to that firm including any interim fees, as may be charged and determined by the Practice Review Committee for that firm. Such fees are

due and payable within 30 days of the date of the invoice raised for this purpose.

550.12 The fees, if any, that are charged for the practice review are based on hourly rates as approved by the Council on the recommendation of the Practice Review Committee. Such fees are in respect of the time

involved in the planning, execution and reporting of the practice review.

5. TRANSITIONAL PROVISIONS

The Institute’s By-Laws (On Professional Conduct and Ethics) [Revised January 2002] and amended from

time to time, continue to operate as follows:

1. 1. By-Law A-4 – continues to apply to those members whose CPE cycle commenced on 1 January 2004 and ends on 31 December 2006.

2. By-Law A-4 [inserted 28 January 2005] - continues to apply to those members whose CPE cycles are as follows: (a) 1 January 2005 – 31 December 2007

(b) 1 January 2006 – 31 December 2008

3. By-Law B-1 – continues to apply to assurance engagements for which the financial period commenced on or before 1 July 2004

4. By-Law B-1 [inserted 28 May 2004] – continues to apply to assurance engagements for which the financial period commenced on or after 1 July 2004 but before 1 January 2007.

5. By-Law B-11 – continues to apply to practice reviews commenced or yet to be completed on or before 1 January

2007. 6. EFFECTIVE DATE

The Institute’s By-Laws (On Professional Conduct and Ethics) [Revised January 2002] and amended

from time to time, continue to operate as follows:

The By-Laws (On Professional Ethics, Conduct and Practice) of the Malaysian Institute of Accountants come into effect on 1 January 2007, unless otherwise stated. The paragraphs in Section 290 relating

to assurance engagements are applicable to assurance engagements for which the financial period

commences on or after 1 January 2007.

For convenience, the effective dates for each section in the By-Laws are set out below.

EFFECTIVE DATE

DEFINITIONS 1 January 2007

(except in so far as it relates to specific

by-laws)

PART I: BY-LAWS ON PROFESSIONAL ETHICS

EXPLANATORY FOREWORD 1 January 2007

PART A: GENERAL APPLICATION .

100 Fundamental Principles and Conceptual Framework 1 January 2007

110 Integrity 1 January 2007

120 Objectivity 1 January 2007

130 Professional Competence and Due Care 1 January 2007

140 Confidentiality 1 January 2007

150 Professional Behaviour 1 January 2007

http://www.mia.org.my/handbook/bylaws_new/05-tra.htm

http://www.mia.org.my/handbook/bylaws_new/06-eff.htm


PART B: PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

200 Introduction 1 January 2007

210 Professional Appointment 1 January 2007

220 Conflicts of Interest 1 January 2007

230 Second Opinions 1 January 2007

240 Fees and Other Types of Remuneration 1 January 2007

250 Marketing Public Practice Services 1 January 2007

260 Gifts and Hospitality 1 January 2007

270 Custody of Clients Assets 1 January 2007

280 Objectivity–All Services 1 January 2007

290 Independence – Assurance Engagements Assurance

engagements – applies to

assurance

engagements for which the financial

period commences

on or after 1 January 2007

PART C: PROFESSIONAL ACCOUNTANTS IN BUSINESS .

300 Introduction 1 January 2007

310 Potential Conflicts 1 January 2007

320 Preparation and Reporting of Information 1 January 2007

330 Acting with Sufficient Expertise 1 January 2007

340 Financial Interests 1 January 2007

350 Inducements 1 January 2007

PART II: BY-LAWS ON PROFESSIONAL CONDUCT AND PRACTICE

EXPLANATORY FOREWORD 1 January 2007

PART A: ALL PROFESSIONAL ACCOUNTANTS

400 Induction Course upon Admission 1 January 2007

410 Continuing Professional Education 1 January 2007

420 Description and Designatory Letters 1 January 2007

430 Public Practice Programme 1 January 2007

440 Attention to Correspondence and Enquiries 1 January 2007

PART B: MEMBERS IN PUBLIC PRACTICE

500 Method of Practice 1 January 2007 (except for

paragraph 500.11 which commences

with effect from 1

January 2008)

510 Professional Indemnity Insurance 1 January 2007

520 Death or Incapacity of a Sole Practitioner 1 January 2007

530 Client Documents and Exercise of Lien 1 January 2007

540 Referrals 1 January 2007

550 Quality Assurance and Practice Review 1 January 2007

7. APPENDICES

I Additional Guidance on Confidentiality for Section 140

In addition to the requirements in Section 140, professional accountants should also consider the additional

guidance for the following situations:

Seeking Additional Advice

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Where a professional accountant is in doubt as to whether he or she has a right or duty to disclose, that professional accountant may, if appropriate, initially discuss the matter within the firm or employing organisation.

If that is not appropriate, or if it fails to resolve the issue, the professional accountant should seek legal advice.

Evidence in Court

Where a professional accountant is requested to appear before a Court of law as a witness against a current or

former client or employer as the case may be, the professional accountant is only legally obliged to do so if served

with a subpoena or other form of witness summons. In legal proceedings, the professional accountant should answer any questions that are put, even though this may require the disclosure of information obtained in a

confidential capacity but guidance may be sought from the Court on whether there is an obligation to answer particular questions.

Assistance to Authorities

If a professional accountant is requested to assist the police, the Inland Revenue Board or other authority by providing information about the business affairs of a client or employer in connection with enquiries being made,

the professional accountant should first enquire under what statutory authority the information is requested.

Unless the professional accountant is satisfied that such statutory authority exists, no information should be given until authorisation has been obtained from the client or employer. If such statutory authority is not forthcoming

and the demand for information is pressed, the professional accountant should not accede unless so advised by his or her legal advisor. The position is the same whether the enquiries relate to a civil or criminal matter.

II Procedures for Seeking Professional Clearance for Section 210

When seeking professional clearance upon a change in professional appointment, professional accountants are required to comply with the following procedures:

1. Upon receipt of a request for information on whether it would be appropriate to accept the engagement, the

existing professional accountant should:

(a) reply in writing normally within 14 working days of receipt of such request, advising whether there are

any professional reasons why the professional accountant in public practice should not accept the engagement; and

(b) if permission is obtained from the client, disclose all such information or if permission is not so obtained,

disclose that fact, to the professional accountant in public practice.

2. If the professional accountant in public practice does not receive a reply to the request for information from

the existing professional accountant after the expiry of 14 working days of such request, the professional accountant in public practice should:

(a) send a reminder to the existing professional accountant by registered post or despatched by hand or by

similar means; and

(b) if no reply to such reminder is received within 14 working days after sending the reminder, endeavour

to communicate with the existing professional accountant by some other means or try to obtain

information about any possible threats by other means such as through inquiries of third parties or background investigations on senior management or those charged with governance of the client.

3. If the requested information is not obtained or if the professional accountant in public practice receives a reply from the existing professional accountant that client permission to disclose information has been refused, the

professional accountant in public practice should consider whether, taking all the circumstances into account,

it is appropriate to accept the engagement.

4. Where a decision is made to accept the engagement, the professional accountant in public practice should

inform the existing professional accountant of this decision in writing and send the same to the existing professional accountant by registered post or despatched by hand or by similar means.

III Additional Guidance on Clients‟ Monies for Section 270

When dealing with clients‟ monies, professional accountants in public practice are required to comply with the following:

1. Clients' monies should be paid without delay into a separate bank account which may be either a general account

or an account in the name of a specific client but which should in all cases include in its title the word 'client'. Any




such account is referred to as 'a client account'.

2. Where a professional accountant in public practice or the firm receives a cheque or draft which includes both clients' monies and other monies, the same is to be credited into a client account. Once the monies have been

received into such client account, withdrawals may be made from that account in respect of such part of the sum received as can properly be transferred to the office account of the firm in accordance with the principles set out

below.

3. Save as referred to in paragraph 2, no monies other than clients' monies should be paid into a client account.

4. Drawings on a client account should only be made:

(a) to meet payments due from a client to the professional accountant in public practice or firm for professional

work done for that client provided that:

(i) the client has been informed in writing, and has not disagreed, that money held or received for the

client will be so applied; and

(ii) a bill has been rendered;

(b) to cover disbursements made on the client's behalf; or

(c) to or on the instructions of the client.

5. Money held by a professional accountant in public practice as stakeholder is regarded as clients' money and should

be paid into a separate bank account maintained for the purpose or into a client account.

6. Records should be maintained by the professional accountant in public practice or the firm so as to show clearly

the money received, held or paid on account of clients, and the details of any other money dealt with by the

professional accountant in public practice or the firm through a client account, clearly distinguishing the money of each client from the money of any other client and from the money of the professional accountant in public

practice or that of the firm.

IV Transitional Provisions and Interpretation for Section 290

Section 290 Transitional Provisions

These transitional provisions are directed towards specific paragraphs in section 290 which were originally issued on 1

July 2004. The transitional provisions therefore relate to the independence requirements that were implemented by

the Institute with effect from 1 July 2004 for assurance engagements for which the financial period commences on or after this date, unless stated otherwise.

Transitional Provision 290-01

The provision of non-assurance services to assurance clients

Part I of the By-Laws addresses the issue of the provision of non-assurance services to assurance clients in paragraphs 290.158 – 290.205 inclusive.

The Council has concluded that it is appropriate to allow a transitional period of one year, during which existing contracts to provide non assurance services for assurance clients may be completed if additional safeguards are put in

place to reduce any threat to independence to an insignificant level. This transitional period commences with effect

from 1 July 2004 for assurance engagements for which the financial period commences on or after this date.


Engagement partner rotation for audit clients that are listed entities

Part I of the By-Laws addresses the issue of engagement partner rotation for financial statement audit clients that are

listed entities in paragraphs 290.154–290.157.

The paragraphs state that in the financial statement audit of a listed entity the engagement partner should be rotated

after serving in that capacity for a pre-defined period, normally no more than five years. This period is the period running from the date of the financial statements that the member first reported on in the capacity of engagement

partner. This would include the period in which the member has been the engagement partner for the audit client prior

to the listing of the audit client (if at all) or the change in status of the audit client to that of a public interest entity, as the case may be.

The Council has concluded that it is appropriate to allow a transitional period of two (2) years for paragraph 290.154

in so far as it relates to the engagement partner. Consequently, while the length of time the engagement partner has

served the audit client in that capacity should be considered in determining when rotation should occur, the member



may continue to serve as the engagement partner for two (2) additional years from 1 July 2004 for assurance

engagements for which the financial period commences on or after this date, before rotating off the engagement. In such circumstances, the additional requirements in section 290 to apply equivalent safeguards in order to reduce any

threats to an acceptable level should be followed.


Serving as an Officer or in other capacity with the Assurance Client

Paragraph 290.149 provides that if a partner or employee of the member firm serves as an officer or as a director on the board of an assurance client or as a liquidator, provisional liquidator, receiver, receiver and manager, special

administrator or persons of like description, the self-review and self-interest threats created would be so significant no safeguard could reduce the threats to an acceptable level. In the case of an audit engagement, if a partner or

employee of a network firm were to serve as an officer or as a director on the board of an audit client the threats

created would be so significant no safeguard could reduce the threats to an acceptable level. Consequently, if such an individual were to accept such a position, the only course of action for the member firm is to refuse to perform, or to

withdraw from the assurance engagement. The Council has concluded that where a partner or employee of the member firm has already been appointed as a

liquidator, provisional liquidator, receiver, receiver and manager, special administrator or persons of like description of

the assurance client prior to the date of implementation, it would be appropriate that paragraph 290.149 will only apply to assurance engagements for which the financial period commences on or after 1 July 2004. However,

paragraph 290.149 will apply to all assurance engagements if a partner or employee of the member firm serves as an officer or as a director on the board of an assurance client whenever appointed as such, or if the partner or employee

of the member firm serves as a liquidator, provisional liquidator, receiver, receiver and manager, special administrator

or persons of like description, if appointed as such after 1 July 2004.


Fees – Relative Size

Paragraph 290.206A(1) provides that in all cases involving listed entities or public interest entities, if the total fees

(arising from assurance and non-assurance services) generated by one assurance client or client group exceed 15% of

the firm‟s total fees in each year over two consecutive financial periods, financial dependency exists. A self-interest threat to independence is therefore created. In such event, the only course of action is to refuse to perform or

withdraw from the assurance engagement.

The Council appreciates that some member firms may have initial difficulty in complying with paragraph 290.206A(1).

The Council has concluded that, subject to approval by the Securities Commission and/or the stock exchange or other relevant authority, it would be appropriate to allow a transitional period of two (2) years for paragraph 290.206A(1),

for those member firms which provide assurance services to listed entities or public interest entities. Consequently,

these member firms may continue with the assurance engagement for the assurance client for two (2) additional years from 1 July 2004 for assurance engagements for which the financial period commences on or after this date

notwithstanding the financial dependency on that client, subject to approval from the Securities Commission and/or the stock exchange or other relevant authority. These member firms should nevertheless, if they wish to continue with

the assurance engagement, take steps to reduce or eliminate the financial dependency on that assurance client. In

any event, the additional requirements in section 290 to apply equivalent safeguards in order to reduce any threats to an acceptable level should be followed.


Provision of Internal Audit Services to Financial Statement Audit Client

This transitional provision is in respect of section 290.186A which has been amended from what was originally issued

on 1 July 2004 and reissued on 1 January 2007.

The Council has concluded that it is appropriate to allow a transitional period of one year, during which existing contracts to provide internal audit services to financial statement audit clients may be completed if additional

safeguards are put in place to reduce any threats to independence to an insignificant level. This transitional period

commences with effect from 1 January 2007 for assurance engagements for which the financial period commences on or after 1 January 2007.

Section 290 Interpretation

These interpretations are in respect of the application of the IFAC Code of Ethics for Professional Accountants to the topics of the specific queries received. They are reproduced herein for ease of reference.

Interpretation 2005-01


Application of Section 290 to assurance engagements that are not financial statement audit engagements

This interpretation provides guidance on the application of the independence requirements contained in Section 290 to

assurance engagements that are not financial statement audit engagements.

This interpretation focuses on the application issues that are particular to assurance engagements that are not

financial statement audit engagements. There are other matters noted in Section 290 that are relevant in the consideration of independence requirements for all assurance engagements. For example, paragraph 290.15 states

that consideration should be given to any threats the firm has reason to believe may be created by network firms

interests and relationships. Similarly, paragraph 290.21 states that for assurance clients, that are other than listed entity financial statement audit clients, when the assurance team has reason to believe that a related entity of such an

assurance client is relevant to the evaluation of the firm‟s independence of the client, the assurance team should consider that related entity when evaluating independence and applying appropriate safeguards. These matters are

not specifically addressed in this interpretation.

As explained in The International Framework for Assurance Engagements issued by the International Auditing and

Assurance Standards Board, in an assurance engagement, the professional accountant in public practice expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about

the outcome of the evaluation or measurement of a subject matter against criteria.

Assertion-based Assurance Engagements

In an assertion-based assurance engagement, the evaluation or measurement of the subject matter is performed by

the responsible party, and the subject matter information is in the form of an assertion by the responsible party that is

made available to the intended users.

In an assertion-based assurance engagement independence is required from the responsible party, which is

responsible for the subject matter information and may be responsible for the subject matter.

In those assertion-based assurance engagements where the responsible party is responsible for the subject matter information but not the subject matter, independence is required from the responsible party. In addition, consideration

should be given to any threats the firm has reason to believe may be created by interests and relationships between a

member of the assurance team, the firm, a network firm and the party responsible for the subject matter.

Direct Reporting Assurance Engagements

In a direct reporting assurance engagement, the professional accountant in public practice either directly performs the

evaluation or measurement of the subject matter, or obtains a representation from the responsible party that has performed the evaluation or measurement that is not available to the intended users. The subject matter information

is provided to the intended users in the assurance report.

In a direct reporting assurance engagement independence is required from the responsible party, which is responsible

for the subject matter.

Multiple Responsible Parties

In both assertion-based assurance engagements and direct reporting assurance engagements there may be several

responsible parties. For example, a public accountant in public practice may be asked to provide assurance on the monthly circulation statistics of a number of independently owned newspapers. The assignment could be an assertion

based assurance engagement where each newspaper measures its circulation and the statistics are presented in an

assertion that is available to the intended users. Alternatively, the assignment could be a direct reporting assurance engagement, where there is no assertion and there may or may not be a written representation from the newspapers.

In such engagements, when determining whether it is necessary to apply the provisions in Section 290 to each responsible party, the firm may take into account whether an interest or relationship between the firm, or a member

of the assurance team, and a particular responsible party would create a threat to independence that is other than clearly insignificant in the context of the subject matter information. This will take into account:

• The materiality of the subject matter information (or the subject matter) for which the particular responsible party is responsible; and

• The degree of public interest that is associated with the engagement.

If the firm determines that the threat to independence created by any such relationships with a particular responsible

party would be clearly insignificant it may not be necessary to apply all of the provisions of this section to that responsible party.

The following example has been developed to demonstrate the application of Section 290. It is assumed that the client

is not also a financial statement audit client of the firm, or a network firm.


A firm is engaged to provide assurance on the total proven oil reserves of 10 independent companies. Each company has conducted geographical and engineering surveys to determine their reserves (subject matter). There are

established criteria to determine when a reserve may be considered to be proven which the professional accountant in public practice determines to be suitable criteria for the engagement.

The proven reserves for each company as at December 31, 20X0 were as follows:

Proven oil reserves thousands barrels

Company 1 5,200

Company 2 725

Company 3 3,260

Company 4 15,000

Company 5 6,700

Company 6 39,126

Company 7 345

Company 8 175

Company 9 24,135

Company 10 9,635

Total 104,301

The engagement could be structured in differing ways:

Assertion based engagements

(ii) A1 Each company measures its reserves and provides an assertion to the firm and to intended users.

A2 An entity other than the companies measures the reserves and provides an assertion to the firm and to intended users.

Direct reporting engagements

D1 Each company measures the reserves and provides the firm with a written representation that measures its

reserves against the established criteria for measuring proven reserves. The representation is not available to the

intended users.

D2 The firm directly measures the reserves of some of the companies.

Application of approach

A1 Each company measures its reserve and provides an assertion the firm and to intended users.

There are several responsible parties in this engagement (companies 1-10). When determining whether it is necessary

to apply the independence provisions to all of the companies, the firm may take into account whether an interest or relationship with a particular company would create a threat to independence that is other than clearly insignificant.

This will take into account factors such as:

• The materiality of the company‟s proven reserves in relation to the total reserves to be reported on; and

• The degree of public interest associated with the engagement. (paragraph 290.20).


For example Company 8 accounts for 0.16% of the total reserves, therefore a business relationship or interest with

the Company 8 would create less of a threat than a similar relationship with Company 6, which accounts for approximately 37.5% of the reserves.

Having determined those companies to which the independence requirements apply, the assurance team and the firm

are required to be independent of those responsible parties which would be considered to be the assurance client

(paragraph 290.20).

A2 An entity other than the companies measures the reserves and provides an assertion to the firm and to intended

users.

The firm would be required to be independent of the entity that measures the reserves and provides an assertion to the firm and to intended users (paragraph 290.17). That entity is not responsible for the

subject matter and so consideration should be given to any threats the firm has reason to believe may be created by

interests/relationships with the party responsible for the subject matter (paragraph 290.17). There are several parties responsible for subject matter in this engagement (companies 1-10) As discussed in example A1 above, the firm may

take into account whether an interest or relationship with a particular company would create a threat to independence that is other than clearly insignificant.

D1 Each company provides the firm with a representation that measures its reserves against the established criteria for measuring proven reserves. The representation is not available to the intended users.

There are several responsible parties in this engagement (companies 1-10). When determining whether it is necessary

to apply the independence provisions to all of the companies, the firm may take into account whether an interest or

relationship with a particular company would create a threat to independence that is other than clearly insignificant. This will take into account factors such as:

• The materiality of the company‟s proven reserves in relation to the total reserves to be reported on; and • The

degree of public interest associated with the engagement. (paragraph 290.20).

For example Company 8 accounts for 0.16% of the reserves, therefore a business relationship or interest with the

Company 8 would create less of a threat than a similar relationship with Company 6 that accounts for approximately 37.5% of the reserves.

Having determined those companies to which the independence requirements apply, the assurance team and the firm are required to be independent of those responsible parties which would be considered to be the assurance client

(paragraph 290.20).

D2 The firm directly measures the reserves of some of the companies.

The application is the same as in example D1.

V Accredited structured and unstructured CPE learning activities for Section 410

1. ACCREDITED STRUCTURED LEARNING ACTIVITIES/PROGRAMMES

(a) CPE courses and conferences organised by the Institute or by the Institute jointly with other professional bodies

or by other organisations endorsed by the Institute.

(b) CPE courses and conferences organised by the recognised bodies as listed in Part II of the First Schedule to the

Act.

(c) Courses and conferences organised by other accredited organisations.

(d) Participation in formal groups and formal self-study programmes designed specifically for members.

(e) Studies undertaken for the purpose of preparing for a post-qualification course.

(f) Studies undertaken after qualification with a view to preparing the member for a postgraduate degree.

(g) Suitable courses run by a university or appropriate institution.

(h) Relevant courses run by a firm in public practice, an industrial company or other business organization.

(i) Correspondence courses, audiotape or videotape packages, courses of programmed texts or other individual

study programmes that are relevant or related to the accountancy profession, which require participation by the

member.



(j) Writing of technical articles, papers or books for publication.

(k) Working as a lecturer, instructor or discussion leader on a structured course will entitle the member to obtain a maximum of 50% of the minimum CPE credit hours (repeat presentations of the course will entitle the member

to not more than 30% of the minimum CPE credit hours for this purpose).

(l) Service as a member of a committee of the Institute and its branches will entitle the member to obtain a

maximum of 2 CPE credit hours for each meeting attended by the member in respect of the committee or the

branch of the Institute as the case may be.

(m) Attendance at Annual General Meetings, Extraordinary General Meetings and Members' Dialogues of the Institute

will entitle the member to obtain a maximum of 2 CPE credit hours for each occasion.

(n) Service as a member of a committee of any one of the recognised bodies as listed in Part II of the First Schedule to the Act and other related bodies, will entitle the member to obtain a maximum of 2 CPE credit hours for each

meeting.

(o) Participation in the Institute‟s activities in the development of standards/guidelines relating to the profession. (A

member shall not be entitled to accumulate more than 10 CPE credit hours for participation in the same activity

in any one cycle). Inserted 26 July 2007; With immediate effect.

2. UNSTRUCTURED LEARNING ACTIVITIES/PROGRAMMES

(a) Reading technical, professional, financial or business literature.

(b) Use of audio tapes, videotape, correspondence courses etc. that are related or relevant to the accountancy profession (where no participation is required).

(c) Participation in meetings, briefing sessions or discussion groups not organised by the Institute or by any of the recognised bodies as listed in Part II of the First Schedule to the Act and other related bodies, but which have

relevance to the accountancy profession.

VI Implementation of the CPE Requirements for Section 410

Category of Members Commencement of new CPE requirements

(i) Members admitted prior to 1

January 2003

Transition – These members will need to complete the CPE cycle pursuant to the existing By-law A-4 from 1 January 2005 to 31 December 2007. Thereafter, the

next CPE cycle will commence in accordance with the new Section 410.4.

(ii) Members admitted between 1

January 2003 to 31 December 2003

Transition – These members will need to complete the CPE cycle pursuant to the

existing By-law A-4 from 1 January 2006 to 31 December 2008. Thereafter, the next CPE cycle will commence in accordance with the new Section 410.4.

(iii) Members admitted between 1

January 2004 to 31 December

2004


old By-law A-4 from 1 January 2005 to 31 December 2007. Thereafter, the next

CPE cycle will commence in accordance with the new Section 410.4.

(iv) Members admitted between 1

January 2005 to 30 June 2005

Transition – These members shall complete the CPE cycle pursuant to the existing By-law A-4 from 1 January 2005 to 31 December 2007. Thereafter, the next CPE cycle will commence in accordance with the new Section 410.4.

(v) Members admitted between 30 June 2005 to 31 December 2005


existing By-law A-4 from 1 January 2006 to 31 December 2008. Thereafter, the

next CPE cycle will commence in accordance with the new Section 410.4.

(vi) Members admitted between 1

January 2006 to 30 June 2006

Transition – These members will need to complete the CPE cycle pursuant to the existing By-law A-4 from 1 January 2006 to 31 December 2008. Thereafter, the

next CPE cycle will commence accordance with the new Section 410.4.

(vii) Members admitted between 1

July 2006 to 31 December 2006

These members will need to complete the CPE requirements in accordance with

the new Section 410.4 from 1 January 2007 onwards.

(viii) Members admitted between 1 January 2007 to 30 June 2007

These members will need to complete the CPE requirements in accordance with the new Section 410.4 from 1 January 2007 onwards.

(ix) Members admitted between to

1 July 2007 to 31 December 2007

These members will need to complete the CPE requirements in accordance with

the new Section 410.4 from 1 January 2008 onwards.

VII Statement on Practice Review for Section 550




REVIEW PROCEDURES AND CONDUCT OF MEMBERS

(Issued 15 November 2002)

Introduction

1. Paragraph (c) of Section 6 of the Accountants Act, 1967 (the “Act”) provides for the Institute, as one of its objectives, to regulate the practice of the profession of accountancy in Malaysia. Paragraph (f) of Section 6 of the

Act further states that the Institute shall be generally able to do such acts as it thinks fit for the purpose of

achieving its objectives, including that of regulating the profession.

2. In pursuance of the above, the Council of the Institute hereby issues this Statement on Practice Review for the

purposes of implementing a practice review programme applicable to all members in public practice as defined pursuant to the Rules and the By-Laws of the Institute.

3. The objective of the practice review programme is to ensure that all members in public practice maintain, observe

and apply the relevant professional standards. Primarily, the practice review programme is intended to be educational and to help members in public practice improve their professional standards where necessary.

Essentially through a review of current engagement files, the practice review programme will identify areas where a member in public practice may require assistance in maintaining professional standards.

4. The practice review programme does not set new standards. Rather, the standards that the member in public

practice is expected to maintain are those already prescribed by the Institute pursuant to the Act, the Rules and the By-Laws of the Institute including all ethical standards in the form of the Institute‟s By-Laws (On Professional

Conduct and Ethics), auditing standards in the form of the Malaysian Approved Standards on Auditing as well as the various guidelines issued by the Institute in the form of Recommended Practice Guides (RPG) and statements

and circulars on best practices issued by the Institute from time to time.

5. This Statement and its supporting appendices set out the conduct and procedures of the practice review programme in general terms. This Statement also provides details of the requirements of the practice review

programme, what is expected of a member during the conduct of a practice review, and a brief description of the

practice review process.

6. This Statement comes into operation on 1 January 2003 and unless otherwise stated by the Council of the

Institute, shall only operate in respect of members in public practice and/or member firms who provide, among others, audit services. Compliance with the requirements in this Statement is mandatory.

Definition of terms

7. member in public

practice

- a chartered accountant who, as a sole proprietor or in a partnership, provides or is engaged in public practice services in return for a fee or reward for such services otherwise than as an

employee, and who holds a valid practising certificate. For the purpose of this Statement, this includes a member firm.

Amended 25 January 2007; With effect from 25 January 2007

practice

review

in relation to a member firm, means an examination or review undertaken pursuant to this

Statement and the supporting appendices to determine whether professional standards are being

or have been observed, maintained and applied.

Practice

Review Committee

a committee established by the Council of the Malaysian Institute of Accountants (the Institute)

to conduct practice reviews to determine whether professional standards have been maintained, observed and applied.

member

firm

for the purpose of this Statement, a firm of chartered accountants where the sole-proprietor or all

the partners are members of the Institute, which is registered with the Institute and which offers among others, audit services.

professional standards

all those professional standards that are required to be maintained, observed and applied by members in public practice from time to time, and which are for the purposes of this Statement,

set out in paragraph 11 below.

reviewer - a. a member of the Institute who is appointed or engaged as an employee by the Institute for the purpose of carrying out practice reviews;

b. a member of the Institute having a valid audit licence and practising certificate who is

appointed to the Panel of Reviewers by the Registrar for the purposes of carrying out practice reviews;


c. a member of the Institute who has retired from public practice and has held a valid audit

licence and practising certificate during the last five (5) years prior to his/her appointment to the Panel of Reviewers by the Registrar for the purposes of carrying out practice reviews;

and

d. any other expert as the Practice Review Committee deems fit and who is appointed on an ad

hoc basis to carry out the assignment of practice reviews or any part thereof.

practising certificate

- the practising certificate issued pursuant to Rule 9 of the Malaysian Institute of Accountants (Membership & Council) Rules 2001.

Panel of

Reviewers

- any member of the Institute, who is not an employee of the Institute and who has since been

appointed by the Registrar as a reviewer to such a panel for the purposes of carrying out practice reviews on behalf of the Institute.

Scope

Members subject to review

8. All members in public practice offering audit services are required to adhere to the standards prescribed by the

Institute. All members in public practice and/or member firms so engaged, must thus submit to practice review, subject to paragraph 9 below.

Exemption

9. Where a member in public practice holding a practising certificate completes a declaration in prescribed form

certifying that he/she is not engaged in public practice services in so far as it pertains to audit engagements during

the preceding twelve (12) months and does not intend to so practise for the foreseeable future, or that he/she will be discontinuing public practice in so far as it pertains to audit engagements in the immediate future (a maximum

of three (3) months from the random selection date), he/she may be exempted from practice review at the discretion of the Practice Review Committee.

Establishment and appointment of Practice Review Committee

10. The Council of the Institute has mandated the establishment and composition of the Practice Review Committee to oversee the conduct of practice review as follows:

a. The Practice Review Committee shall consist of such number of members, being not less than eight (8), as

the Council shall determine not more than half of them and shall also be members of the Council.


b. All the members of the Practice Review Committee shall be members of the Institute and a majority of them

must hold a valid practising certificate and an audit licence currently in force.

c. A person shall not be a member of the Practice Review Committee and the Investigation and Disciplinary Committees as well as the Disciplinary Appeal Board at the same time.

d. The quorum for any meeting of the Practice Review Committee shall not be less than half of the total number of members of the Practice Review Committee for the time being.

e. The Practice Review Committee may appoint sub-committees of its members and may delegate to any such

sub-committee, with or without restrictions, any of its functions or powers except the power to make a complaint against a member in public practice or a member firm to the Investigation Committee.

f. Members of the Practice Review Committee are not eligible to be appointed to the Panel of Reviewers and

vice-versa.

g. The Chairman of the Practice Review Committee shall be a Council Member. of the Institute with a valid

practicing certificate and audit licence. Deleted 26 August; With effect from 15 July 2007.

h. Subject to the provisions, if any, under the Accountants Act, 1967 and any directions issued by the Council

from time to time including those contained in this Statement and supporting appendices, the Practice

Review Committee or any sub-committee thereof may regulate its own procedures and processes as it thinks fit.


Directions of Council

Professional standards

11. The Council has from time to time, issued or specified the professional standards which are to be maintained, observed and applied by members

in public practice who offer, among others, audit services. These professional standards form the subject matter of the Institute’s practice review

programme as herein contained. Practice review however, does not seek to redefine the scope and authority of these professional standards but

rather seeks to enforce them within the parameters so specified. For the time being and for the purposes of this Statement, the professional

standards which will be examined under practice review are as follows:

a. all standards and statements of professional conduct and ethics in the form of the Institute‟s By-Laws (On

Professional Conduct & Ethics) in issue from time to time, in so much as these ethical standards and statements relate to the conduct of audit engagements and/or that of the member firm;

b. all standards and statements of accounting in the form of the approved standards and pronouncements

issued by the Malaysian Accounting Standards Board (MASB) from time to time in so far as significant departures therefrom may affect the requirement for financial statements to give a true and fair view; and

c. all approved auditing standards, and guidelines and statements of best practices in issue from time to time.

This will also include recommended practice guides (RPG), statements and circulars issued in relation to audit engagements and the practices of a member firm.

Scope

12. The Council has directed the Practice Review Committee to conduct practice reviews pursuant to this Statement

and its supporting appendices, in order to determine that the professional standards specified in paragraph 11 above are observed, maintained and applied by all member firms, subject to paragraph 9 above.

Extent of powers

13. Practice reviews will be performed by reviewers employed by the Institute and/or those who have been appointed

to the Panel of Reviewers by the Registrar. In order to ensure proper administration of the practice review

process, the Practice Review Committee is allowed to exercise its full powers as provided in this Statement and pursuant to any other directives issued by the Council without restriction.

Panel of Reviewers

14. A Panel of Reviewers will be established by the Institute to undertake the function of practice review in addition to

the reviewers so employed by the Institute to conduct practice reviews. A person who is a member of the

Institute and who holds a valid audit licence and practising certificate or who has retired from public practice and has held a valid audit licence and practising certificate within the last five (5) years shall be eligible to be

appointed to the Panel of Reviewers subject to the following provisions:

a. The person must have successfully passed an interview process conducted by the Practice Review Committee

and subsequently been recommended to the Registrar by the Practice Review Committee to be appointed to the Panel of Reviewers.

b. A person shall not be a member of the Panel of Reviewers and the Investigation and Disciplinary Committees

as well as the Disciplinary Appeal Board at the same time.

c. A person currently under investigation by the Institute‟s Investigation Committee is not eligible to be

appointed to be a member of the said Panel of Reviewers. An existing panel member who has become the subject of an investigation by the Institute‟s Investigation Committee must resign from the Panel of

Reviewers upon notification of commencement of investigation.

d. Each member of the Panel of Reviewers except for those who have retired from public practice, must undergo the process of practice review within a year of his or her first appointment to the panel. Although

member firms are selected on a random basis, the person who sits on the Panel of Reviewers shall volunteer

his or her firm for the practice review within six (6) months after the expiry of the first year of his or her appointment to the Panel of Reviewers should his or her firm fail to be selected under the normal random

selection process.

e. The appointment to the Panel of Reviewers must be validated by a letter of appointment signed by the

Registrar.


f. All appointments to the Panel of Reviewers shall automatically lapse on 31 December of each calendar year

unless a letter of re-appointment issued under the hand of the Registrar is sent to the panel member‟s last known registered address with the Institute one (1) month or earlier before the expiry date of 31 December

of that calendar year.

g. As stated in paragraph 10 of this Statement, a person cannot be a member of the Practice Review

Committee and the Panel of Reviewers at the same time and vice -versa.

h. Subject to sub-paragraph c. above, an advance notice of one (1) month should be given to the Registrar prior to any resignation from the Panel of Reviewers. Any notice period of less than one (1) month shall be

accepted at the Registrar‟s own discretion.

Conduct of practice reviews

Objective

15. Essentially, a practice review entails, among other things, a review of current audit engagement files and related financial statements to ascertain that the member firm is adhering to professional standards. Where a member

firm is not following professional standards in certain situations, suggestions and recommendations for

improvement may be made, and possibly followed by a further review, in keeping with the educational thrust of practice review. The number of current audit engagement files to be reviewed depends on:

a. The degree of reliance, if any, to be placed on internal quality controls of the member firm; and

b. The size of the member firm being selected for review.

A summary of the practice review procedures designed to meet the above objective is contained in Appendix A

herein.

Selection of member firms for review

16. The Registrar will randomly select member firms for review and will determine the order of review. A member firm will not be selected until at least eighteen (18) months have elapsed since the commencement of the

member firm based on the Institute‟s records.

17. Member firms may also be selected for review based on referrals from other regulatory bodies in Malaysia or other committees of the Institute. The Practice Review Committee shall, at its sole discretion, determine whether

to undertake the review of any member firm as mentioned above.


18. Upon the selection of the member firm to undergo the practice review process, the member firm will be duly notified within a week in writing via registered post by the Institute. The Registrar will assign such reviewer at his

discretion to the member firm that has been selected for the practice review process.

19. The identity of the member firm shall be kept confidential from all parties including the Practice Review Committee and those staff of the Institute not directly involved in practice review, save for those relevant

reviewers or members of the Panel of Reviewers (as the case may be) who are directly involved in the review of that member firm and those regulatory bodies as mentioned in paragraph 27(3).


20. Where the member firm selected has branch offices or associated practices under more than one name, in so far

as possible, the practice review will be conducted to cover all these branches or associated practices at the same

time. Members in public practice should ensure that the Institute is aware of all modes of practice conducted by them in order that this can be facilitated.

Notifications

21. In the event that a member of the Panel of Reviewers has been assigned to review a member firm, the name of

the member of the Panel of Reviewers who has been appointed to do the review as well as the firm which he/she

is currently practicing under will be disclosed to that member firm. Upon notification of the identity of the assigned member of the Panel of Reviewers, the member firm selected for review will have to inform the Institute

within 7 days if there is any professional reason why the assigned member of the Panel of Reviewers should not be conducting the review of that member firm.


22. If the professional reasons given are acceptable, the Registrar will then nominate another member of the Panel of

Reviewers for consideration of the member firm, to carry out the review of that member firm.

23. Enclosed with the notification letter will be a Practice Review Questionnaire (the Questionnaire). The member firm

should complete the Questionnaire and return the same through the member firm‟s designated practitioner (the sole practitioner, the senior partner or other partner designated as responsible for practice review), along with all

information requested, to the Institute within the required period as may be stipulated in the notification letter.

24. The reviewer assigned to the member firm will be responsible for arranging the on-site practice review visit, which will normally be scheduled within six (6) weeks of such notification. The member firm shall notify the

Institute immediately if they consider the timing of the visit to be inconvenient and shall specify the reasons

thereto. Another date will be arranged by mutual consent such that the review will be held within four (4) months of such notification. Any further extension is at the reviewer‟s sole discretion and shall only be granted for valid

reasons.

25. The member firm shall be given reasonable notice of the selection of client files for inspection. The selection of

client files is made by the reviewer from the most current client listing as provided by the member firm. Such

listing must be certified as complete by the member firm prior to the selection of sample files. As a rule of thumb, the member firm should always ensure that all current audit engagements which are representative of the

operations of the firm should be readily retrievable during the on-site practice review. For the purposes of the practice review, such current audit engagement files refers to engagements which have been signed off in the

past eighteen (18) months up to the date of the on-site practice review or any other dates that can be reasonably

accepted by the reviewer as a practical alternative.

Arrangements for review

26. On-site practice review visits will be conducted at the member firm‟s registered office or other registered place of business. The member firm should ensure that the reviewer is given access to all offices if there are more than

one (1) and is given all reasonable assistance for the proper conduct of the practice review. It is expected that

the reviewer will be provided with adequate office facilities for him/her to perform his/her work effectively and efficiently.

Access to documents

27. (1) The following provisions shall apply as regards to any practice review:-

(a) Any person, to whom this paragraph applies, and who is reasonably believed by a reviewer to have in

his/her possession or under his/her control any record or other document which contains or is likely to contain information relevant to the practice review shall:-

(i) produce to the reviewer or afford him/her access to, any record or document specified by the

reviewer or any record or other document which is of a class or description so specified and which is in his/her possession or under his/her control being in either case a record or other

document which the reviewer reasonably believes is or may be relevant to the practice review, within such time and at such place as the reviewer may reasonably require;

(ii) if so required by the reviewer, give to him/her such explanation or further particulars in respect

of anything produced in compliance with a requirement under subparagraph (i) as the reviewer shall specify;

(iii) give to the reviewer all assistance in connection with the practice review which he/she is

reasonably able to give.

b. Where any information or matter relevant to a practice review is recorded otherwise than in a legible

form, any power to require the production of any record or other document conferred under paragraph (a), shall include the power to require the production of a reproduction of any such

information or matter or of the relevant part of it in a legible form.

c. A reviewer may inspect, examine or make copies of or take any abstract of or extract from a record or document which may be required to be produced under paragraph (a) or (b). However, the making

of copies should not be extended to cover those of the member firm‟s current or previous clients‟ listings.

d. A reviewer exercising a power under this paragraph shall, if so requested by a person affected by

such exercise, produce for inspection by such person a copy of the appointment furnished to him/her prior to the commencement of the review.

2. Subsection (1)(a) applies to any member of the Institute employed or involved in the member firm to which


the particular practice review relates or to any person employed by or whose services are engaged by such

firm.

3. In the event that the audit engagements files selected for review are in respect of clients from any

regulated industry, subsections (1)(a), (c) and (2) shall only apply after the prior consent on access to those files has been obtained by the Institute from the relevant regulatory body(ies).


28. Normally the reviewer will require a copy of the financial statements relating to the client file reviewed. The

financial statements will be used as a reference for the Practice Review Committee to assess the adequacy of

auditing procedures in relation to the materiality of the items concerned. Before the copy of the financial statements is submitted to the Practice Review Committee for consideration, all references to the client‟s name or

names and references within the financial statements which could reveal the client‟s or the member firm‟s identity will be concealed by the reviewer.

29. Subject to paragraph 27(3), where it is considered necessary for the proper completion of the review, a reviewer

may request copies of other documentation. In such circumstances, the identity of the client or references which would reveal the identity of the member firm will be concealed by the reviewer prior to the submission of these

copies to the Practice Review Committee for consideration.


Reporting

30. At the conclusion of the practice review, a reviewer is required to make a report to the Practice Review

Committee. In doing so, the reviewer shall not name any individual in the report except in a suitably codified manner.

31. A reviewer shall, before making the report required herein, send a dated draft of the reviewer‟s report to the

member firm concerned, and to each individual (if any) who is named in the report by registered post or recorded

delivery addressed to the registered office or registered address of the member firm or the individual, as the case may be.

32. The member firm, following the receipt of the draft report has twenty-one (21) days beginning the day after the day the dated draft is sent to make any submissions or representations, in writing to the reviewer, concerning the

dated draft of the reviewer‟s report.

33. The reviewer is required to attach any written submission or representation made, to the reviewer‟s report in its final form before submitting it to the Practice Review Committee. The reviewer will delete any reference to the

member firm‟s identity in these written submissions or representations to preserve anonymity.

34. The reviewer will subsequently send to the member firm a copy of the final report as submitted to the Practice

Review Committee, by registered post or recorded delivery.

Powers and procedures of the Practice Review Committee

General

35. The Practice Review Committee shall:-

a. determine the practice and procedures to be observed in relation to practice reviews to the extent not set out in this Statement and supporting appendices;

b. issue instructions to any reviewer on any matter relating to practice reviews or a particular practice review;

c. do or perform any other thing or act as may be incidental to or which it considers necessary or expedient for

the performance of its functions or exercise of its powers under this Statement.

Review and Report

36. After completing the draft report process, the reviewer will forward a copy of the reviewer’s report, any submissions or representations from the

member firm (suitably summarised and codified) to the Practice Review Committee for its review.

Follow-up action


37. On receiving the report from a reviewer, the Committee, having regard to the report and any submissions or

representations attached to it, may:

a. make recommendations to the member firm concerned regarding its application or observance of (or lack

thereof) professional standards;

b. (i) issue an instruction to a reviewer to carry out, within such period as may be specified in the instruction

(which period shall not commence earlier than twelve (12) months after the date on which the

instruction is issued), a further practice review as regards the member firm to which the report relates; and

(ii) specify in the instruction, the matters as regards which the review is to be carried out;

c. if it is of the opinion that any one or more or all of the partners in the member firm subject to practice review may have failed to observe, maintain or apply, as the case may be, professional standards, then

subject to paragraph 37 below, the Practice Review Committee may make a complaint regarding such partner concerned or, in case there is more than one such person concerned, a separate complaint in respect

of each of them, to the Investigation Committee of the Institute.

38. Where:-

a. there exists a potential complaint; and

b. immediately prior to the commencement of the relevant practice review -

c. (i) the proprietor or partner to whom the complaint relates had not previously been a partner in any firm

at any time when a practice review was carried out as regards that firm; and

(ii) a practice review had not previously been carried out as regards his practising on his own account,

the Practice Review Committee shall NOT refer the complaint to the Investigation Committee UNLESS it is decided

by a majority of three quarters of its members for the time being that, had the grounds of complaint or any such ground or any matter or matters complained of having been established, the relevant act or omission by such

proprietor or partner would have amounted to unprofessional conduct within the meaning prescribed pursuant to

Rule 2 of the Malaysian Institute of Accountants (Disciplinary) Rules 2002.

39. The Practice Review Committee shall make recommendations to the member firm where:

a. it considers that the member firm has satisfied all key control objectives which the Practice Review

Committee determines are required to maintain professional standards but where further improvements could be made to internal quality control systems; and

b. it considers that the member firm has satisfied the major key control objectives but some weaknesses exist in others. The member firm is then expected to consider the recommendations for rectifying the weaknesses

in controls and take all necessary action to ensure that all key control objectives are achieved. A follow up

meeting will be conducted after twelve (12) months or if possible, even earlier to enquire about the progress of the implementation of the recommendations.

40. A follow up review will be required where the member firm has not satisfied the Practice Review Committee that all the key control objectives have been maintained and where the deficiencies are likely to materially affect the

overall quality of an audit engagement. In such cases the Practice Review Committee will also make

recommendations, which it expects the member firm to implement in order to ensure the maintenance of professional standards. The implementation of these recommendations will be examined during the follow up

review.

41. It is clear that where a potential complaint relates to the first ever review of the individual concerned, whether in the member firm which is the subject of the report, or in any other member firm previously reviewed, no

complaint can be lodged with the Investigation Committee unless the conditions set out in paragraph 41 below are fulfilled. This provision is in line with the educational thrust of practice review and the Council‟s commitment

to work with members to improve professional standards.

42. The Practice Review Committee will, even on a first review, make a complaint against a member where the weaknesses in the performance of audit engagements, or the disregard of professional standards amounts to, in

its opinion, unprofessional conduct within the meaning prescribed pursuant to Rule 2 of the Malaysian Institute of Accountants (Disciplinary) (No. 2) Rules 2002. In subsequent reviews, the Practice Review Committee can make a

complaint where it is of the opinion that the member has failed (or has shown no credible intention) to maintain,

observe or apply the professional standards as expected of him or her.

43. Where the Practice Review Committee refers a complaint to the Investigation Committee, the reviewer shall disclose the identity of the

member(s) in public practice or the member firm as the case may be, as well as submit all reports and files including working papers and

correspondence pertaining to the review, to the Investigation Committee for its investigation.


Referral of disputes

44. Where a dispute arises over the powers of reviewers as regards to the access to the documents etc. of the member firm, the reviewer or member firm or both may refer the dispute to the Practice Review Committee. A

member firm should refer a dispute to the Practice Review Committee in writing via the Registrar.

45. Normally, the Practice Review Committee will delegate the determination of such a dispute to a sub-committee

chaired by the Chairman of the Practice Review Committee. As far as possible the anonymity of the member firm

will be maintained. The Registrar will delete any references to the member firm‟s identity from written communications before passing these on to the Practice Review Committee.

46. Where a dispute is referred, after considering any submissions or representations (which shall be in writing) made

by the relevant member firm and/ or the relevant reviewer, the Practice Review Committee:-

a. shall determine the dispute and communicate such determination to each of the parties to the dispute; and

b. may issue directions relating to the matter in dispute to such member firm or the reviewer concerned and require such member or reviewer to comply with them.

47. Where a member firm or a member in public practice is required to comply with a direction given by the Practice

Review Committee and fails to comply with the said requirement, the Practice Review Committee may make a complaint to the Investigation Committee regarding the member firm or member in public practice concerned on

a simple majority basis.

Confidentiality

48. Strict confidentiality provisions shall apply to all those involved in the practice review process, namely the

Registrar, reviewers, members of the Practice Review Committee, or any person holding a position who assists any of these parties.

49. Each person referred to in paragraph 48 above shall:

a. at all times after his/her appointment preserve and aid in preserving secrecy with regard to any matter

coming to his/her knowledge in the performance or in assisting in the performance of any function;

b. not at any time communicate any such matter to any other person; and

c. not at any such time suffer or permit any other person to have any access to any record, document or other

thing which is in his/her possession or under his/her control by virtue of his/her being or having been so

appointed or his/her having performed or having assisted any other person in the performance of such a function;

provided that the above provisions do not apply in relation to disclosures made in relation to or for the purpose of any investigation and disciplinary proceedings or criminal proceedings and subject to the Institute‟s sole

discretion, specific requests from relevant statutory bodies and regulatory authorities.

50. In order to enhance confidentiality and impartiality, neither the identity of the member, the member firm or the member‟s clients will be made known to the Practice Review Committee. Any report prepared by the reviewer for

the Practice Review Committee will only identify the member firm and its clients by code numbers.

51. Where the final practice review report has been issued by the Practice Review Committee and no further action is

required, the report, work papers and correspondence pertaining to the review shall be destroyed after one year.

Data required for administration purposes shall be retained in order to evidence that a review requiring no further action has been completed and to identify the members and the firm reviewed. Where the Practice Review

Committee decides that further action is necessary, all files shall be retained until such further action has been

completed to the satisfaction of the Practice Review Committee.

Completeness of Review

52. For practical reasons, not all partners of a member firm that have been selected for practice review will be reviewed individually as regard to the

current audit engagement files.

53. However, in most circumstances, the sample of files selected for on-site practice review should be reflective of the firms‟ overall operations and size. Appendix B herein sets out a flow chart of a general indication of such file

selection.

APPENDIX A


Summary of Practice Review Procedures

Introduction

The Practice Review Committee shall, among other things, determine the detailed practice and procedures to be observed in relation to practice review. The framework for the review procedures as contained herein have been

endorsed by the Council and shall act as supplemental to the Statement on Practice Review issued by the Council on

15 November 2002 and which comes into effect on 1 January 2003. These procedures are summarised below and can be categorised into three stages - planning, execution and reporting.

Planning

- Selection of member firms by Registrar

The Registrar will select member firms randomly from the register of member firms maintained by the Institute.

Each member firm shall have an equal chance of being selected. However, the Practice Review Committee may

also, at its sole discretion, review any of the member firms which are referred by other committees of the Institute or other regulatory bodies in Malaysia. All member firms selected will be codified so as to ensure the identities of

the firms concerned remain confidential.


- Notification – Selection of Reviewers by the Registrar

A member firm will be notified in writing about an impending practice review and will be informed of the assigned reviewer – either a reviewer who is a staff of the Institute or a person appointed from the Panel of Reviewers.

- Notification - Enclosure of Questionnaire

A Questionnaire will be sent to the member firm for completion together with the notification of practice review.

- Return of completed Questionnaire

The member firm should complete and return the Questionnaire within one (1) month of receipt. The information

will be used for the planning of the review.

In addition, member firms are required to prepare a complete list of their audit clients, suitably arranged if desired,

and to provide any other information the reviewer considers necessary to facilitate the selection of a sample of audit engagements, representative of the member firm‟s client portfolio, for review.

- Confirmation of visit

In consultation with the member firm, a date will be set for the on-site review to be carried out. Flexibility will be

permitted to ensure that members in public practice are not inconvenienced at especially busy periods. The on-site review date will be arranged by mutual consent such that the review will be held within four (4) months of

notification. Further extension beyond four (4) months will be at the sole discretion of the reviewer.

Execution

It is estimated that at least a full day will be needed to complete an on-site review for a member firm of a smaller size. However, this is based on the assumption that the member firm concerned has made all the necessary

information and documentation available to the reviewer for his review. Reviews of larger firms may take longer to

complete.

- Initial meeting

An initial meeting will be held between the reviewer and a partner of the member firm designated to deal with the

review (designated partner). The primary purpose of this meeting is to confirm the accuracy of the responses given

on the Questionnaire. The description of the system in the Questionnaire may not fully explain all the relevant procedures and policies adopted by the member firm and this initial meeting can provide additional information.

The reviewer should have a full understanding of the system and be able to form a preliminary evaluation of its

adequacy at the conclusion of the meeting.

Larger firms which have extensive documentation regarding their practice and procedures (i.e. formal office procedures manuals and audit manuals) will find it unnecessary to document all the controls and will just cross

reference the Questionnaire to the relevant sections of their manuals. For firms like these, an additional planning

visit will be arranged before the on-site review to review the relevant manuals.


- Compliance review - general controls

The reviewer may carry out a compliance review of the general controls of the member firm and evaluate the

degree of reliance to be placed upon them. The degree of reliance will, ultimately, affect the sample size of audit engagements to be reviewed.

The following five (5) key controls are included in the Questionnaire:

- Independence

- Maintenance of Professional Skill and Standards - External Consultation

- Staff Supervision and Development - Office Administration

Member firms are expected to address each of the five (5) key control areas.

In each key control area of the Questionnaire, there are supplementary questions and matters to consider. These are intended to indicate the kind of controls that are expected to be installed and operated within each firm.

All questions are not necessarily relevant to particular types of member firms because of their size and culture etc. However, member firms should still assess their internal control systems to ascertain whether they address the

objectives under the five key control areas.

- Selection of audit engagements to be reviewed

The number of audit engagements to be reviewed depends upon:

a. the number of partners involved in audit engagements in the firms selected ; and

b. the degree of reliance placed, if any, on general quality controls.

For the number of audit engagements to be actually reviewed, please refer to the flowchart in Appendix B as

provided herein as a general guideline.

From the clients list as provided and certified as complete, the reviewer, in consultation with the member firm, will

proceed to select an actual sample of audit engagements for review. The engagements reviewed should be a balanced sample from a variety of different sized clients covering various industries so that they reflect the “overall

performance” of the said firm under review. Accordingly, if the reviewer considers that the actual sample is not

representative of the member firm‟s audit client portfolio, he may proceed to choose an additional number of files in excess of those as depicted in the enclosed flowchart in Appendix B.

The population from which files are selected for review will be audits completed at least six (6) months preceding the date of the notification letter but not earlier than eighteen (18) months prior to the selection date.

- Review of files

The reviewer may adopt a compliance approach or substantive approach or a combination selection of both in the

review of audit engagement files.

- Compliance approach - audit engagements

The compliance approach is to assess whether proper control procedures have been established by the member

firm to ensure that audits are performed in accordance with approved Auditing Standards and Guidelines and such

control procedures are consistently adhered to by the member firm.

The following six (6) key controls are included in the Questionnaire:

- Audit File Administration

- Financial Statements Presentation - Review and Evaluation of System of Internal Controls

- Substantive Tests

- Audit Conclusion - Audit Report

- Substantive approach - audit engagements

A substantive approach will be employed if the reviewer chooses not to place reliance on the member firm‟s

specific controls on audit engagements or is of the opinion that the standard of compliance is not satisfactory. This approach requires a detailed review of the audit working papers in order to establish whether the audit work has


been carried out in accordance with approved Auditing Standards and Guidelines. Such a review is similar to the

type of review performed by the engagement partner/manager during normal audit engagement procedures. This approach is likely to take longer than the compliance approach.

- Closing meeting

At the end of the on-site review, the factual findings will be discussed with the designated partner of the firm being

reviewed or the sole practitioner. During the closing meeting, the designated partner/practitioner has the opportunity to make representations, suggestions and recommendations in relation to the matters raised. The

reviewer has the duty of explaining to the designated partner/practitioner the advantages and benefits of

implementing suggestions and recommendations for improvements.

Reporting

The reviewer will prepare a report to the Practice Review Committee (the reviewer‟s report), incorporating the report

of factual findings as discussed with the member firm. After review by the Practice Review Director (or Senior

Manager) of the Institute, a dated draft of the reviewer‟s report will be sent to the member firm for comments. This process should not take more than two (2) months after the closing meeting. Any comments made must be submitted

in writing within twenty-one (21) days. The reviewer will finalise his/her report upon the receipt of the submissions. In finalising the report, the reviewer may make changes to the dated draft he/she considers appropriate in light of the

submissions. The submissions will be attached (after properly codified) to the reviewer‟s report before it is sent to the

Committee for consideration.

The member firm will be allowed the opportunity to make its representations throughout the review process. It is expected that the on-site closing meeting between the reviewer and the firm will provide an excellent channel for the

communication of views concerning the findings and recommendations. In addition, the member firm has twenty-one

(21) days to consider the dated draft report and make its formal submissions and representations to the Practice Review Committee through the reviewer.

A meeting of the Practice Review Committee will be held to consider the reviewer‟s report and the member firm‟s submissions. The Committee may issue a final report to the member firm and instruct the reviewer to perform any

follow-up action considered appropriate. The final report can be categorised as follows:-

(i) Such report may contain minor recommendations for improvements to the systems. The member firm may

exercise its discretion in considering what course of action to be taken. The Institute will not perform any follow-

up procedures to ensure changes are made.

(ii) A variation to the type of report as mentioned in (i) above is issued where the member firm is found to have

achieved the major control objectives but some weakness are found in certain control areas which are considered material enough to bring to the attention of the firm. The said firm should seriously consider the suggestions and

recommendations and take all necessary action (implementing new procedures) to ensure the objectives of the

particular control areas are achieved. A brief review/meeting will be arranged with the member firm about twelve (12) months after the issue of the final report or if possible, even earlier, to establish whether changes have been

implemented.

(iii) Finally, there is also a report where a member firm is deemed to have failed to satisfy the Practice Review Committee that it has sufficient controls to ensure its practice work is consistently carried out in accordance with

applicable professional standards. In such case, the Practice Review Committee will order the reviewer to perform another practice review no earlier than twelve (12) months after the issue of the final report. This will allow time

for the member firm to take steps to improve its controls system as suggested.

It is possible that where the third type of report reveals extensive weaknesses amounting to unprofessional conduct within the meaning prescribed pursuant to the Malaysian Institute of Accountants (Disciplinary) Rules

2002, the Practice Review Committee can make a complaint to the Investigation Committee for its investigations.

MIA (by law)

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